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    Plan the Trade Before You Enter It

    A man surveys a capital markets conference, illustrating the value of having a trading plan before entering a position.

    I have learned that one of the easiest ways to make trading harder is to enter a position without knowing what I am doing next.

    You buy the stock. Now what?

    Before I put the trade on, I want to know why I am entering, where I want to enter, where I think it can go and what would tell me I am wrong. I also want to know how much I am risking relative to the potential reward and whether the position size makes sense.

    The setup gives the trade context. Am I buying a swing off support? A breakout through resistance? A retest? A rising trend? If I cannot answer that, it becomes very easy to invent a new story once I am emotionally involved.

    The same is true of the exit. I want an initial target, even if I later adjust it because the stock becomes stronger than I expected. And I want the failure point. If the trade depends on support holding and support clearly breaks, that matters. I want to make that decision while I am calm, not while the stock is moving quickly against me.

    Once I know the entry, target and stop, I can look at the trade as a bet. Is the potential reward meaningfully larger than the downside I am accepting? If not, why am I taking it?

    Then there is position size. A good setup can still become a bad personal decision if I am so heavy that every tick changes my mood. I want enough exposure for the trade to matter without making it impossible to think clearly.

    I like writing all of this down. After the trade I can compare what happened with what I planned and see whether the problem was the setup, the execution or my own behaviour.

    A plan does not guarantee a winning trade. It gives me something to come back to when the noise gets loud.

    Read How I Think About Trading, Why I Keep a Trading Journal, and Position Size, Risk & the Anxiety Test.

    This article is educational only and not investment advice. Trading involves risk, including possible loss of capital.

    Chad McMillan, creative entrepreneur and strategic advisor
    Chad McMillan

    Chad McMillan is a creative entrepreneur and strategic advisor with over 20 years of experience in and around the capital markets, focused on finding hidden potential in companies, ideas, markets and people, and advancing what they can become.

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