Let’s establish something right off the bat. There’s no such thing as perfection in the marketplace, it’s simply non-existence. But as traders, we can always AIM for a perfect trade, regardless. While there’s no such thing as perfection, we can construct a great trade idea.
With a series of steps to follow, anyone can construct a great trade idea, to aim for perfection.
Step one: Find the “Trigger Point”
While watching the markets, you need a trigger point which is what ATTRACTS you to that specific stock.
Keep in mind: the trigger is NOT telling you to buy, it’s NOT telling you to sell, it’s NOT telling you anything at all. It’s simply attracting you to a stock and it’s giving you an idea.
So what factors are considered a trigger point?
You can have some form of catalyst such as News or earnings, FDA Approval, etc, that is pushing the stock higher or lower. Basically, increasing or decreasing the demand. Price action is another great trigger point as it showcases something like a chart pattern, bull flag, bear flag, critical levels being broken, divergence, something that is being shown on a chart thats gives you an IDEA that you could either buy or sell.
Now once you have a trigger it pushes you a little closer to your trade idea, however it wont be enough to determine much. The trigger only gets you interested in the stock, but the next thing you need to do is be able to construct a trade set-up, moving into step two.
Step 2: Hypothesize
Constructing a trade set up involves hypothesizing what you believe will occur in the market, after determining your trigger point. While trading, you should never try to predict what will happen without evaluating all of the data. Each trade should be purposeful and with no guesses involved.
For example, “I think the stock will ______ because of_____.”
It’s important to do this in order to prevent any major losses, and to succeed in the market long term. Heres a quick run down: gather as much data as you possibly can to form a hypothesis of what will happen in account for various scenarios.
The trigger point along with a hypothesis wont make you into a successful trader. You’ll have to further evaluate on it with the third step, which is Risk Analysis.
Step 3: Risk Analysis
Risk Analysis is a proven way of identifying and assessing the factors which could negatively affect the outcome of your trade. Basically, it will help you to cut down on your losses and protect your account from losing too much money. As important as it is, many traders still tend to overlook it!
It’s simply not enough to just form a hypothesis with all of the data you’ve gathered. You can come up with the most perfect plan but something can always go wrong. Analyzing your risk can provide you with a proper understanding as to how much is at stake
For instance, a stop loss can protect your trade from rapid changes in the market, and protect your trade when prices move against you.
Understanding factors such as, your entry point, exit point, stop loss, profit target, position sizing, are all incredibly relevant to risk analysis.
Step 4: Execution
Trading execution is the completion of a buy or sell order. It may sound simple, but there is more than meets the eye.
In this final step, your emotions could step in and take complete control over you. However, considering you have a proper plan in place you might be able to avoid any major errors.
During the execution stage, you have the entry point and the exit point.
Entry and Exit are the two most fundamental things in stock market which is neglected by a large number of people mainly because there is no proper guidance about it.
Entry price is the price at which you enter, or take position in the market. The entry point is usually a component of a predetermined trading strategy for minimizing investment risk and removing the emotion from trading decisions. While determining your entry point, you will need patience in order to buy at the right time. This will help you to maximize your returns!
Exit price is the point at which you sell off or exit from the position. There are only two ways in which you will exit a trade: taking a loss or making a gain. When you did your risk analysis you had already planned your exit price potential. Now, all you have to do is stick to the plan!
Proper execution of the initial plan will ensure that you have a successful trade. Even if it isn’t successful, you will be able to minimize your losses and learn from your mistakes.