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Trading Up-Close: Making a Trading Plan

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Upbeat music throughout.

Onscreen text: Trading Up-Close

Onscreen text: Making a Trading Plan

Middle-aged man speaking to camera.

Onscreen text: Kevin Horner, Senior Manager, Trading Services Education

KEVIN: You’ll probably never hear of a successful trader who doesn’t have a specific, written trading plan. Risk is inherent in all trading, so having a trading plan won’t ensure success, but having one is a best practice for disciplined trading.

Blue square appears next to speaker. Laptop comes up with various small icons appearing around and above the computer.

KEVIN: There’s a lot you can put in your plan, and it can be adjusted as you learn what works best for you. But here are some basics to get you started.

Onscreen text: Basics to get you started.

Drawn person dressed in yellow and black stands on top of a price chart line with a handheld telescope, pointing with their index finger extended with their other hand.

KEVIN: Just make sure to write it down. If it’s only in your head, it’s much easier for emotions to distract you.

Onscreen text:

Planning basics

  • Set goals

KEVIN: First, set your goals. For example, you might decide you want to learn a specific trading strategy and try to perfect it for your own style.

Onscreen text:

Planning basics

  • Set goals
  • Research and analysis targets

KEVIN: Then, set realistic targets for the time you’ll need to devote to research and analysis.

Onscreen text:

Planning basics

  • Set goals
  • Research and analysis targets
  • Trade frequency

KEVIN: Define how often you will you trade―multiple times a day, several times a week, or a few times a month perhaps. This kind of a plan will help build the discipline you’ll need for trading.

Onscreen text:

Planning basics

  • Set goals
  • Research and analysis targets
  • Trade frequency
  • Budget and risk levels

KEVIN: Next, figure out how much money you’re budgeting for trading and then set your risk levels per trade.

Blue square appears with a descending bar graph and a yellow arrow above going down from left to right.

KEVIN: How much are you willing to risk on any one trade—most people stay close to 1%, but some might trade up to 5%.

Blue square with dollar sign and a varying color ring around it. $10,000 appears just below it.

KEVIN: If your trading portfolio is $10,000 and you risk 5% …

Below the $10,000 appears “-5%”.

KEVIN: … that would mean a $500 loss on that trade.

The “-5%” transforms into “-$500.”

KEVIN: After several losing trades in succession …

Two more “-$500” numbers appear below the first one.

KEVIN: … you might find your risk tolerance isn’t really 5%. If so, consider shifting your risk level to a more comfortable point. 

Two icons, one of a small gray cube and a gold coin with a dollar sign in the middle. One arrow goes from the cube to the coin, and the other goes from the coin to the cube. Then the two icons switch places.

KEVIN: Now determine how much risk you are willing to take with each trade. Striking the appropriate risk-to-reward ratio is one of the keys to trading successfully over the long haul.

Drawn person in a green top sitting at a desk and looking at a desktop computer screen with a bar graph on it.

Onscreen text: 1:3 Risk-to-reward ratio

KEVIN: Many traders opt for a 1 to 3 ratio or higher―they only enter a trade when every dollar they plan to put at risk has the potential to return $3 or more. Some successful traders lose more trades than they win, but they still come out ahead because they manage that risk-to-reward ratio. So let’s say you decide to aim for a 1:3 ratio, and you place ten trades where you risk losing $100 on each …

Drawn person moves down and to the left and the onscreen text disappears. Ten small icons appear with a gray cube and a gold coin and arrows going between them. Below these icons is a white line with “-$100” at the far left and “+$300” on the far right of the line. A question mark goes back and forth on the white line.

KEVIN: … and a potential gain of $300 on each. If you lose seven of the trades,

Seven icons have red circles around them. In red, “-$700” appears below.

KEVIN: … that’s a $700 loss, but your three winning trades generated $900 in profit.

Three icons have green circles around them. In green, “+$900” appears below the “-$700.”

KEVIN: In this example, you come out ahead.

White line appears below the “+$900” and then “+$200” below that.

KEVIN: Include specific entry and exit rules in your plan.

Blue square appears along with two shopping carts side-by-side. The one on the left has a large price tag with a blue arrow pointing down on it. The one on the right has a large price tag with a yellow arrow pointing up on it.

KEVIN: Knowing your entry and exit levels ahead of time can help keep emotions in check. Many traders use a watchlist of stocks that they check regularly,.

Blue square on the right side of the frame with a clipboard and a checklist attached to it. Squares next to items on the list are filled with check marks from top to bottom.

KEVIN: The more frequently they trade, the more they check it.

Magnifying glass appears and hovers over checklist, revealing chart lines.

KEVIN: They want to learn the stocks’ behavior patterns and understand their price ranges.

Candlestick chart appears with various green and red candlesticks. The pattern from left to right goes down slightly, then up, and then slightly down again. A yellow line appears, even horizontally with the lowest red candlestick.

Onscreen text: Floor | Support Level

KEVIN: These ranges occur between two levels, the floor, or support level—from which the stock’s price has moved up because there were more buyers than sellers—

Light blue line appears from left to right even with top of the highest candlestick.

Onscreen text: Ceiling | Resistance Level

KEVIN: … and the ceiling, or resistance level, where there are more sellers than buyers, driving the stock price lower.

Drawing of man in blue shirt sitting with his back to us at a desk with two computer monitors.

Onscreen text: Record keeping.

Zoom into the computer monitor on the left with some text appearing. Small icons of a target with an arrow in the bullseye, and two shopping carts with price tags in them.

Onscreen text: What your target was

Onscreen text: What your entry and exit points were

KEVIN: Record keeping is also an important part of your plan. Track the details of your trades so you can see what your target was, what the entry and exit points were, …

Move over to the computer monitor on the right with text and two more small icons, one of a clock and another with two horizontal lines and a vertical arrow between them.

Onscreen text: How long you held the position

Onscreen text: What the support and resistance levels were

KEVIN: … how long you held your position, and what the support and resistance levels were. Then look back at how you did. That’s how you’ll learn what works and why and, conversely, what doesn’t work so you can make adjustments as you continue to trade.

Blue square to the right of the speaker. Icon of a drawn man sitting at a desk with a computer monitor in profile. Question mark appears between the man and the monitor. Question mark then turns into a light bulb.

KEVIN: When it’s time to place a trade, it is common to second guess your decisions. Using good analysis and knowing how to enter and exit a trade can help ease that anxiety. In the next video we’ll talk about the types of analysis, when to use them, and the various order types that can work best with your trades.

Onscreen text:

Important Disclosures

The information here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The type of investment strategies mentioned may not be suitable for everyone. Each investor needs to review a security transaction for his or her own particular situation. 

Examples used herein are not intended to represent the past or future performance of any specific strategy.

©2021 Charles Schwab & Co., Inc. (“Schwab”). All rights reserved. Member SIPC (1021-1DVU).

What goes into a trade plan? Kevin Horner discusses the key elements in a plan and how they should inform every trade you make.

Important Disclosures

The information here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The type of investment strategies mentioned may not be suitable for everyone. Each investor needs to review a security transaction for his or her own particular situation. 

Examples used herein are not intended to represent the past or future performance of any specific strategy.

(1021-1DVU)

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