Building a trading plan

Everything so far, trend and levels, patterns and indicators, is only analysis. It becomes a trade the moment it turns into a plan: a specific decision about where you get in, where you get out if you are wrong, where you take profit, and how much you are willing to lose. A chart tells you what might happen. A plan tells you what you will do.

The four parts of a plan

Entry. Where and why you get in. Not a vague sense that you feel bullish, but a specific setup with confluence: a pattern at a level, in the direction of the trend, confirmed by volume. For example, buy on a close above resistance at 1,540 on strong volume. The entry has a reason you can say in one sentence.

Stop-loss. Where you are wrong. This is the single most important part of the plan. You place it beyond a level or structure, so that if price reaches it, the reason for the trade is genuinely broken. The stop defines how much you risk per share, and it is not optional.

Target. Where you take profit. Usually the next significant resistance for a long trade, or a measured move from a pattern, or simply a multiple of the distance to your stop. Knowing the target in advance stops you from grabbing tiny gains or holding forever.

Position size. How many shares or lots, chosen so that if the stop is hit, you lose only a small, pre-decided fraction of your capital. This is where the plan connects to the risk management of the first course.

The stop defines the trade

Here is the idea that reorders everything. You do not size a position by how much you hope to make. You place the stop where the idea is wrong, measure the distance from your entry to that stop, and then choose a size so that this loss is only a small slice of your account. Risk comes first, and size follows from it. A common rule is to risk no more than one or two percent of your capital on any single trade, so that no one loss can hurt you and a losing streak cannot ruin you.

Reward against risk

Before taking a trade, compare the distance to your target, the reward, with the distance to your stop, the risk. A trade worth taking offers reward meaningfully larger than risk, often two or three times as much or more. The reason is the honest math from the first course: if your winners are two or three times your losers, you can be right less than half the time and still come out ahead. That is what a good risk-to-reward ratio buys you, room to be wrong often and still profit.

What to carry forward

Analysis becomes a trade only when it becomes a plan, and a plan has four parts: an entry with a one-sentence reason, a stop where the idea is proven wrong, a target where you take profit, and a size set so a stop-out costs only a small, pre-decided slice of your capital. The stop comes first and the size follows from it, and you take a trade only when the reward clearly outweighs the risk, so that being wrong often still leaves you ahead. Above all, the plan is written before the trade, when you can still think clearly.

Writing a plan is the easy part. Following it, when the market is triggering every emotion you have, is the hard part, and it is what the next chapter is about.