Mish's Market Minute

How to Create a Successful Trading Plan

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Some people say that trading takes nerves of steel and insane willpower. Maybe people with these skills exist, but to become successful at trading you don't need to have such rare superpowers. What a successful trader needs, and what many traders fail to create, is a solid plan. Therefore, we will go through some simple yet important points for creating an effective trading plan.

All great trading plans have solid rules in these three areas:

  • Risk Control
  • Profit-Taking
  • Trade Entry

First, a great trade plan must be easy to understand. If a trading plan has easy-to-understand and logical rules, a trader will follow and trust the rules. For instance, at MarketGauge, when it comes to risk control, we like to risk 1-2% of a total account on any given trade. This means that, if you have 10 active trades and the market falls apart, the most you could lose is 10% based on 1% risk per trade.

A trader should also expect to make a certain amount of profit from each trade. In general, a trade should make at least double the risked amount. Therefore, if you risk $100, you should at least expect to make a profit of $200 or more from that trade.

Additionally, every trade should have a specific reason for entry. This can be up to interpretation and is based on an individual's trading style. Some traders like to buy breakouts, while many like to take reversal or pullback trades. Either way, a trader should create a list of criteria for entering a trade. This will help them quickly decide if the trade is worth taking or if the chart pattern is forming an entry signal.

With that said, creating a solid plan is the key to having nerves of steel, as it allows a trader to follow logically sound rules that take the personal bias and fear out of trading. Negative emotions in trading are empowered by unknown factors, and that's what a solid trading plan aims to fix.

As far as today's action in the market, the rules just stated apply for sure, but even with these rules, one must understand why the market falls so hard and have some context for getting involved from the long side at all.

Here is Mish's final tweet of the day: "The last time I was this light equities was end of January 2020-for what that is worth-we bought bonds while the market dropped 40%-then we saw the now hackneyed phrase 'dip' to buy-if you are buying dips now, please have some context."


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On the latest edition of StockCharts TV's Mish's Market Minute, Mish does something a little different by taking you through the top Renaissance Capital holdings that are heavy in the tech space. She takes a deep dive to see if there are any strategic moves to make while the market is extremely tough.


ETF Summary

  • S&P 500 (SPY): Watching to find support or to clear over Monday's high of 436.56.
  • Russell 2000 (IWM): Resistance the 200-DMA at 218.83.
  • Dow (DIA): 332 next support level. 345.06 gap to fill.
  • Nasdaq (QQQ): 369.43 now minor resistance.
  • KRE (Regional Banks): Dojo day. 61.06 support area.
  • SMH (Semiconductors): Sitting on the 50-DMA at 263.82.
  • IYT (Transportation): 245.54 gap to fill.
  • IBB (Biotechnology): 169.02 the 50-DMA.
  • XRT (Retail): 91.14 support area.


Forrest Crist-Ruiz

MarketGauge.com

Assistant Director of Trading Research and Education

Mish Schneider
About the author: serves as Director of Trading Education at MarketGauge.com. For nearly 20 years, MarketGauge.com has provided financial information and education to thousands of individuals, as well as to large financial institutions and publications such as Barron’s, Fidelity, ILX Systems, Thomson Reuters and Bank of America. In 2017, MarketWatch, owned by Dow Jones, named Mish one of the top 50 financial people to follow on Twitter. In 2018, Mish was the winner of the Top Stock Pick of the year for RealVision. Learn More
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