The importance of a decent trading plan cannot be overstated. However, for it to work, the strategy has to be adhered to consistently, as Michele 'Mish' Schneider, director of trading research and education at MarketGauge.com, considers here.
With crazy market volatility and wide price swings, having a trading plan couldn’t be more important for a day like Wednesday (10 February).
At around 10:20 ET the market began to sell off rapidly, turning into a large drop.
Though the market rebounded, such large price swings could have easily gotten traders out of the market if they panicked and sold.
No matter what type of trader you are, you should have a plan for every trade or position you have on.
For day traders, this is especially important, as a day like this could easily create some nasty losses.
Additionally, these are the kind of days where emotions love to jump in and make big decisions for you.
There is a common misconception that trading takes nerves of steel. But nerves of steel are far from needed if you have a trading plan.
All the main decisions to trade successfully can be made before entering the position/trade.
Decisions like: “How much money am I going to risk on a trade, and how much will I expect to make from this trade if it works in my favour?”
At MarketGauge, we like to risk anywhere from 1%-2% of our total portfolio or account size on a single trade.
MarketGauge's risk margin
For example, if you have an account size of $10,000 and you risk 2%, that will equal $200.
Here is quick breakdown of what to do next once you know your risk per trade.
Say you decide to buy a stock at $10 with risk to $8. If the price goes to $8, you will exit the trade for a $2 loss per share. Knowing this, how many shares can you buy?
Well, if you are only risking a maximum of $200 on a trade then you can buy (200/2 = 100 shares). Buying 100 shares at $10 (entry price) uses $1000 of your $10,000.
This is a great way to help plan out trades and to manage how much you are willing to lose if the trade goes against you.
This article was originally published on MarketGauge. With over 100 years of combined market experience, MarketGauge's experts provide strategic information to help you achieve your investing goals.