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do in this chapter. Then, in Chapter 14 we will introduce you to a great way to find these proven patterns before each trading day. |
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Use a Statistically Valid Trading Plan for Every Trade |
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Four elements are involved in developing a statistically valid trading plan: |
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1. Determine risk and reward before making the trade. In this chapter, we see how to use proven chart patterns to identify the action, entry point range, initial protective stop (which identifies your risk), and exit target (which estimates your reward). |
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2. Use sound money management techniques to determine the size of your position (the number of shares to trade) to protect your capital and to maximize profit. We cover this in Chapter 14. |
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3. Manage the predefined risk. You have defined your risk and set your stops. You now know where to exit if the trade is moving against you. Will you have the discipline to do it? |
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4. Manage the predefined reward with intelligent exit strategies. There are several successful exit strategiesfrom the conservative to the aggressivein Chapter 14; we will explore them all. |
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Once you learn to approach trading through this process you can put the mathematical odds in your favor. That's right, in your favor! With this process, you only use proven chart patterns that produce winning trades more than 50 percent of the time, that is, which risks $1 for every $2 in potential reward. You hold to these guidelines for each trade you make. |
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If you will execute to these limitsdon't "fudge" on them, you will return an average of $0.50 on every share of every trade you make. |
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