Keep It Simple Stupid. Entries, Stop Loss, Targets, and Position Size.
Trading without a plan is a surefire way to getting crushed. Trading with a plan and sticking to that is how eliminate and control your emotions trading, the key to become a winning traders.
The 2nd best time to enter a trade is on a breakout. A breakout is when price moves above a resistance level. The resistance could be a moving average, trend line, or previous highs. The best time to enter a trade is on the pullback to the original breakout area. But that breakout area has to hold as support.
Your stop loss is an area or price level in which you have to close your trade for a loss. Your stop loss is a technical area. It is not an XX% loss. Your stop loss should be based on trend lines, support levels, or moving averages. If you are strictly day trading, stop losses are essential. If you do not trade with a stop loss, then your trade will go to zero.
Targets are price levels in which you will sell your full or a portion of your position for a gain. Targets are also technical levels such as previous resistance areas, psyche numbers (10, 25, 50, 100, etc), or Fibonacci extensions.
Believe it or not, your position sizing is the most important aspect of this lesson. Size too big, and you get emotional when your trade goes against you. Size too small, and you start FOMO-ing in on the way up, likely turning a winner into a loser.
Your position size should be based on how much money you are willing to risk on a single trade. The general rule is you should never risk more than 1-2% of your account. Your position size should remain constant for all trades.
Trade: ASAN. Downtrend price, looking for a bear rally. Possible inverse head & shoulders reversal pattern. 10 days in consolidation range.
Entry: Breakout over $55 resistance
Stop Loss: Support = $45, resistance = $55. We’ll use $50 as a stop loss since it is the middle of the range and is a large psyche number. If price is in the bottom half of a consolidation range, then it is more likely to break to the downside. We will sell our full position if $50 is broken to the downside.
Targets: Previous support & resistance levels and previous pivots. Targets 1 and 2 also line up well with the 34 and 55-EMAs. 3rd target unlikely to hit so far above the EMAs. With 3 targets, we will sell 1/3 of our position at each target.
Risk = $5 per share
Risk:reward = 5:7.5 for 1st target; 5:15 for 2nd Target. Don’t take a trade with a risk:reward > 1. You should always strive to profit more than you risk.
We have a $10,000 account. 1% of $10,000 is $100. Total risk is $100.
Position size = (total risk) / (risk per share) = $100 / $5 = 20 shares.
Result to date:
> Bought 20 share at $55 each for a total of $1,100
> Sold 7 shares at $62.50 for a 13.63% gain or $52.50
> Sold 7 shares at $70.00 for a 27.27% gain or $105.00
> Holding 6 shares for our 3rd target. You can add a trailing here to either the breakout area $55 or the first target area $62.50. You do not want to turn a winning trade into a losing trade so your stop loss on the remaining position should be no lower than $55, the original breakout area. Remember, previous resistance = future support.
> All in all, so far this trade has resulted in a realized gain of $157.50 or 20.45%.
Remember, trading is only risky if you don’t take the time to plan your trades. Entries, exits, risk, and position sizing are essential.