Using Trade Plans for Guidance

by Bob Eldridge

One of the most important aspects of successful trading is knowing what you're going to do before you have to do it. I refer to this in our daily trading labs as a "Trade Plan." I create and publish a plan for every trade we enter well before we enter it for several reasons.

First, is the difficulty of trying to think on your feet while embroiled in the trade itself. Trading "as the spirit moves" is a great way to introduce emotion into your trading, which is not a good thing. Emotional trading will confuse you and cause you to make the wrong decisions. Emotional trading will have you selling when you should buy and buying when you should sell. Having a plan will eliminate that aspect.

Without a trade plan, you have no way of determining when the trade is successful. I know that most folks will say that a successful trade is one that is profitable. I'd agree with that, but a professional trader will think in more specific terms than simply "profitable." There are many ways to determine when a profit is a profit, that is when the profit is enough, but perhaps the most prudent way in most directional trades is to allow the stock to tell you when it's through paying you. I am referring to the use of trailing stops.

Below is a sample of one of my trade plans. It's real. We traded this one very recently as a matter of fact. Read through the plan to see if you can pick up the "direction" it offers.

RISK ASSESSMENT: This trade is highly speculative and might produce a loss. Potential risk in this trade might be as high as the difference between the strike prices minus any credit PER SHARE. Be certain that you can afford to LOSE this much if you enter the trade. It is STRONGLY suggested that new traders PRACTICE this strategy until proficient before risking money in a funded trade!.

Notice how the plan begins with a general statement of observed conditions and/or circumstances surrounding the stock. The stock shows fairly strong support around $150. This fact dictates that we have a compelling reason to enter a 145/140 bull put spread.

If you will read through the plan (just below the chart) you'll see that we have carefully thought through the trade in advance. We have determined when to enter the trade, based upon when the stock price begins to move, in both directions. We have determined what to do while we're in the trade; providing for defense (the contingent order to buy to close) and management (leaving the trade alone).

Finally, we have determined how and when to exit the trade. With those key points firmly embedded in our heads, we're ready to proceed with the trade without fear of having market conditions or stock price movement predispose us to panic reactions.

You may not agree with the way I plan the trade. That's perfectly okay as we all trade differently. But I truly hope you see the benefit in the fact that I do plan the trade. Otherwise your trade can really get messy.

Latch onto the solid techniques taught by Bob Eldridge in his Cash Flow Labs. The Morning Lab, geared for those who can watch the market during the day, meets each weekday at 9:15 a.m. The Evening Lab, designed for those who need to set up their trades after the market is closed, meets on Tuesday at 10 p.m. and Thursday at 8 p.m.

Bob will be teaching "Nifty Fifty," a premium two-hour online class on June 6. Bob will show how it is possible to make money (30-50 cents on each option contract) almost every morning by trading in the first 30 minutes. If you like to trade early and take the rest of the day off, this class is ideal for you.

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