As the stock market corrects and potentially forms a new trend, traders who don't have strict plans might be wondering what to do next. So far, many symbols, along with the market, are not dipping like many expected and people are either realizing large losses or sticking to their trading plan.
The rules created through trial and error allow successful traders to not only make money, but also keep it when times get tough, and volatility increases. While there can be many pieces to a puzzle, here are three important pieces every trader must have when creating a successful trading plan:
1. Know why you entered a trade.
This might sound simple, but defining the trade will allow you to know if the trade is or isn't working correctly. For instance, if you bought a dip, you would be looking for a quick pop-up in price. Another example would be if you bought a symbol on a breakout; if the price is not holding over the breakout level, the initial trade idea could be wrong.
Once you realize the trade isn't behaving as you originally expected, this gives you the opportunity to exit the trade early or figure out the next best way to manage the position.
2. Always have a risk point or stop loss level.
Before you put a trade on, you need to pick a price level where, if broken, you will exit the trade no matter what. If you don't pick a concrete price level, you could easily take large losses as you question your exit price. Many traders make more losing trades than winning trades; however, since they control their losses, they can still come out profitable in the long run.
3. Pick a trading style.
Many traders constantly switch their trading styles with rules, indicators and more. In order to build consistent trading profits, you will need to narrow your focus into one trading style.
Jumping from one to the next is great when you're first exploring how you want to trade, but you will never get a chance to fully test out the rules you have created if your style continues to change. Many traders get stuck in a loop of trying something for only a short amount of time before deciding it doesn't work or that they would rather trade another way. Therefore, keep these three points in mind on your trading adventure as many trading traps lurk in these areas.
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It's been a hectic week in the markets and we are finally seeing them take a dive! On this week's edition of StockCharts TV's Mish's Market Minute, Mish takes a deep dive into the charts, showing you what stagflation looks like and how to trade during this rocky period.
- S&P 500 (SPY): Broke the 200-DMA at 441. Watch 426 next support.
- Russell 2000 (IWM): Watching to find support.
- Dow (DIA): 340 next area to watch for support.
- Nasdaq (QQQ): 350 next support area.
- KRE (Regional Banks): 68.63 the 200-DMA next support area.
- SMH (Semiconductors): 269.15 the 200-DMA.
- IYT (Transportation): Watch to hold low near 254.
- IBB (Biotechnology): Needs to hold the 128 area.
- XRT (Retail): Like this to find support in the 76 area.
Assistant Director of Trading Research and Education