5: Develop a trading plan based on your own research
A trader’s own research, not emotions or speculation, should be the driving force behind developing a trading plan. With so much information readily available in the public domain these days, it may be tempting to rely on someone else’s work or research. This can backfire for a few reasons.
First, whatever methodology is being promoted actually may not be profitable. Second, even if it is profitable to someone else, it does not guarantee that it will be to other traders. Different trading styles and risk tolerances mean that trading plans are not one-size-fits-all.
Finally, traders should fully understand the logic behind a trading plan; otherwise, it is possible to lose trust in a plan, making it easier to deviate from the rules.
6: Know your exit strategy
Before entering any position, traders should have an exit strategy in place. This should be included in the trading plan and define how the trader will get out of both winning and losing positions. Many traders agree that money is made in the exit. This means that regardless of where a position is entered, it’s the exits that determine if it will be a winning or losing trade.
While we often think of trade exits in terms of dollar-based profit targets and stop losses, there are other methods for determining exits. A trading plan could utilize a time- or activity-based exit, such as closing the trade after a certain number of bars have printed, after a specified amount of time has elapsed, or at the end of the trading session (“EOD” or end-of-day close). Exits also can be based on some type of market activity or technical analysis. For example, a trade could stop-and-reverse if a technical indicator gives an opposing signal.
Regardless of approach, it is important to have an exit strategy in place before entering any trade. It can mean the difference between not only a winning and losing trade, but a winning and losing business.