scorecardresearchHow to build an effective trading plan?

How to build an effective trading plan?

Updated: 15 Dec 2022, 04:59 PM IST
TL;DR.
First you need to identify the stocks you plan to trade the next day. How do you do that? Let’s say, you believe in trading in NIFTY 100. Your only reasons could be these are established company stocks, with better liquidity and so on.
Build an effective trading plan

Build an effective trading plan

“Plan your trade, trade your plan.”

As discussed in my previous columns, first you need to identify the stocks you plan to trade the next day. How do you do that? Let’s say, you believe in trading in NIFTY 100. Your only reasons could be these are established company stocks, with better liquidity and so on.

As explained in earlier columns, you need to go with the strongest stocks, so apply the formula for momentum stocks as explained in my earlier column, “What is momentum strategy? How does it work in the bear market”? and arrange the stocks in descending order in terms of their strength which is known as Relative Strength or RS.

Choose the top ten strongest stocks in order of RS. Please understand trading is a process and you need to know the reason as to why you have chosen the above stocks.

Then you need to check these stocks, as to whether they have qualified as buy or not on your system as explained in my column, “How to be an effective trader? Learn from these 6 trading strategies used by traders.” There may be situations where the stock is amongst the strongest stocks in terms of RS but on that day it may have not generated a buy signal, in such a case ignore the stocks. Remember you will only go ahead if it has given a buy signal for the following day.

Then you do the position sizing of these stocks based on the risk you are willing to take as explained in my column, “Allocating money or risk? Learn how to have the correct position size when trading stocks.” This will help you to know the number of shares you are supposed to buy based on the risk levels.

So now you know exactly the reason as to which stocks to buy and how much quantity to buy. The next day you enter the strongest stocks which have given you a buy signal. Now when it comes to entering a particular stock you can buy it any time during the day. This reminds me of a famous quote from the Chicago stock exchange, which goes as follows, “Amateurs open the markets, and professionals close the markets.”

Once you get an entry in your list of stocks, do not forget to put the stop loss once the entry is confirmed. Here there are two ways – the first is perhaps your stop loss is based on exit if it goes below the stop loss price, in such a case you must enter your stop loss after trade confirmation. The second type of stop loss is based on a closing basis, which means if the stock closes below the stop loss then you exit.

The closing basis stop loss could be a bit tricky. Supposing there is some negative news in the stock and the stock trades below your stop loss, you never know how much further it could go low. That may wipe you out at times. On the flip side, it can also happen that for a moment the stock may go below your stop loss price only to bounce back sharply and not close below the stop loss for the rest of the day. This is where you need to take a call as to which type of stop loss you would prefer.

Finally, there will be times when the going is good and you have a continuous winning streak and due to this your account is profitable. In such a case you need to be aggressive but not too aggressive. When I say aggressive, you can increase your risk percentage marginally and if you are lucky you may end up scoring home runs. Similarly, if the going is tough and your account is underwater (below your starting capital) you need to be conservative by cutting down the bet size by reducing the risk.

With this final plan, I come to the end of this series where I have covered the various aspects of trading and how to go about it. Wishing you all the luck in your trading journey.

Follow the entire series here.

Kirit Manral is a professional trader, and has been running a mentorship program in trading since 2019, with mentees from around the globe. He can be found on Twitter at @KiritManral
 

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First Published: 15 Dec 2022, 04:59 PM IST