Execution is key in trading. Now that you have developed your trading strategy, it’s time to get to executing your edge. This will involve creating a trading plan. You must have a step-by-step guide to execute your trading strategy. Execution in trading is all about being emotionless and knowing exactly what you need to do. This is how you can achieve consistency.
Where to start?
You need a step-by-step guide to executing your strategy. Look at your trading strategy and decide what your first step is. Here is a brief outline of what my strategy guide entails. Note: this is for trading strategy only and not overall trading business plan. This is a small part of the overarching plan.
Bias or Direction
Is there a bias? If there is, you must be aware of it. There are numerous ways you may find directional biases – I use the higher timeframe for this. Identify any bias you have and move on to the next step.
Having identified whether or not there is a bias, you can decide what the target for the trade is. This target may be based on the bias we just discussed, a magnetic price point, or the next trouble area. None of these options are inherently better than the others, though over time you may find that one has a higher winrate or one has a higher reward to risk ratio.
Once you have a target, you can move on to trade entry.
You know where your target is – let’s get to finding that entry. Make sure you’re on your trading timeframe, flick down from a higher timeframe if you used that for a bias. When finding your trading strategy, you will have found your entry criteria. Now is the time to apply the strategy you found.
Grade your trade entry area
Many traders I know use a grading system for their trade setups. This could be grading the chart pattern only or everything about it. I prefer to grade separately. It can really help your trading if you find a repeatable way to grade and quantify trade setups. If you can grade your trades without including any emotion or internal biases then this can help your dataset along the road.
Grade the confluence
When using confluence in your trading, it’s best to know just how good it is. If you find that one method of confluence has more predictive power than another, give it more weighting in your grading system. I prefer to grade my confluence separately from the trade chart pattern, it’s just how I’ve become accustom. There is no right or wrong way for you to track this.
Stop loss placement – does it give acceptable reward-to-risk?
The third essential element for a trade (as well as entry and target) – the stop-loss. This is the point in the market where you perceive yourself to be wrong on the trade idea. This where you cut your position and return to the sidelines.
This final step to your trade entry is also what decides the reward-to-risk on the trade. Very important at this phase: knowing how often you expect to win. If you expect to win 70% of the time, you can afford to shoot for around 0.43R at an absolute minimum. That is your breakeven level. This will change depending on your average loser, but I’ve assumed average loss to be -1R. (You will almost definitely want to aim for more 0.43R however, as this is just your breakeven level trade).
This is the final part of your trading plan – managing the trade. There are two components to trade management once in a trade:
- Trade is onside. The trade is moving in your favour, it’s in positive territory. What’s your plan? You need to have a plan for moving your stop nearer to current price (if you’ve found a way to do this effectively) and a plan for evolving reward-risk. Trailing the stop needs concrete rules, write them in your plan. Evolving reward-risk is a concept popularised by Tom Dante and entails calculating what your floating reward-risk is on the trade. Being at +90 with a stop at -100 and a target at +100 means that you are risking 190 to make 10. The trade can be closed at any time. This is clearly not an advantageous position to be in, plan for it.
- Trade is offside. How will you exit your trade if given signs to get out? Cutting your losers is a fine art, it requires a lot of analysis of past trades and solid trade execution to bail out early. Find as many clues as possible to give you reasons to get out. Having small average losers over time is a huge huge advantage.
Now that you have your trading strategy in a simple and easy to read guide, start executing your edge. If you cover these steps in enough detail and fit them to your strategy, you should have no problem with trade execution.
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