Stocks: Hidden Blueprint for Profiting In Stock Trades -
Entering, Holding and Exiting - Part 1
To quote that famous line from the eighties television show, The
A-Team:
I love it when a plan comes together
With stock trades, I always have a plan, and so do all
successful traders. Why is this so important?
First of all, having a plan means you`ve thought about why
you`re making the trade in the first place. You have a
compelling reason for the trade and you see that it has a good
risk-to reward ratio. Without a reason for the trade and a sense
of what the reward should be, there`s no way you can form a
rational plan.
Second, having a plan eliminates the uncertainty that everyone
has when a trade you make starts to move in the wrong direction.
That uncertainty can be the source of significant losses. If you
have a plan, you know exactly what to do and when you need to do
it. You`ll have thought out the possible outcomes ahead of time.
There`s nothing to panic about.
Third, besides minimizing the risk of panic, having a plan also
minimizes other kinds of risk and maximizes reward because, by
following the plan, you force yourself to act only in
advantageous ways. You`ll minimize risk and maximize reward by
choosing a profitable entry point, and avoiding money losing
entries, holding your position safely, keeping stops set where
you`ve planned to set them, and exiting profitably at an
appropriate time.
In the market, every trade you make is a trade either toward
losing or toward winning. And within every trade, each step,
entering, holding, and exiting, also moves you toward either
winning or losing. That`s why each step requires planning,
attention, and discipline. I will touch on the importance of
each stage of the trade in this article, and cover them all in
more detail in following articles.
It helps to understand that you can`t know for sure where the
best entry and exit point are, and that it doesn`t matter.
Successful trading doesn't require knowing things for certain.
Instead, it requires you to be able to gauge probabilities. If
you always do the things that have the highest probability of
working, they should work out many more times than not.
Finding a low-risk entry point for a trade is every bit as
important as finding a good trade. How can this be? You can pick
the best trade in the world, but if you enter it at the wrong
place, you may make no profit on it at all, and you may actually
lose money.
Nobody knows, for instance, which stocks are going to make them
rich in five or ten years. Many companies won`t even be around
in five or ten years. Doesn`t it make sense for anyone, trader
or investor, to enter a stock at a point where it has a better
chance of making them money instead of losing them so much that
they have to wait five years to get their initial investment
back? Finding a safe entry point ensures you have the best
chances of making a profitable trade.
The next part of your strategy involves keeping your position
out of trouble while you hold it until you are ready to take
profits. The most important part of this step involves setting
stops. You must set stops on every trade. I cannot stress the
importance of stops enough, and have several articles on the
topic that you may want to read to get a better understanding of
how necessary stops are.
Now that you`ve started to make profits on your trade, your plan
should tell you when it`s time to exit. Knowing when to exit is
as important as knowing when to enter. Traders who hold their
stock trades too long often find that their profits have
disappeared. They ended up making no money, or even incurred a
loss, on what should have been a profitable trade. With
planning, this will never happen to you. Once you've created a
plan that details how you will find entry and exit points, and
how you will maintain your position safely, you will be well on
your way to having your stock trades ALL COME TOGETHER!