Making a Plan
After gaining a sense of where the market has been and where it is going, and before you place your first trade, it is best to plan the trade from beginning to end. When you are starting to trade it is often very easy to get caught up in the moving markets and forget your original objective of the trade. If you have a written plan of each trade you will have a record of the entry point, expected length of the trade, expected exit point of the trade, and expected outcome of the trade. Writing down the goals of a trade will give you the most benefits and control of your daily, weekly, and monthly overall day trading profit. Writing down each trade's goals will teach you to enter into each trade with a clearly defined outcome.
You should know before you open a trade at what point you expect to close the trade, and lock in your profits. This thinking through the trade before committing to it will help you gain control over your trading. If this is not done, you will get into the habit of opening and closing trades at any point of the market, with no goal other than to make money. A goal of trading to make money is not a plan. Your day trading should be treated like a business, and the capital in your account should be treated as an asset to reach your goals. In order to reach your goal of having a profitable day, week, or month day trading, each trade should be planned. It is better to have three or four well-planned trades during the day than to engage in a series of rapid-fire opening and closing of trades without any thoughts to their placement.
Many sports coaches teach their players to visualize personal goals during training sessions. A weightlifting coach might tell the trainees to visualize themselves lifting certain target amounts. A gymnastics coach might tell the team members to visualize making a perfect landing after a vault. Visualization is often a key to many top athletes reaching their goals.
Remember, you are building the balance of your cash account in order to have a surplus in the account, with hopefully enough surplus to make a withdrawal from the account at the end of the month to pay your expenses and give yourself a salary. Successful businesspeople evaluate potential investments carefully and rank each one on its own merit and potential. Even though they might have the means to get financially involved with every deal that comes across their desk, they are wise enough to limit what they get into, and they have learned to be patient to wait for only the best deals. Each trade you enter into is a form of a deal. When a trade is profitable, you can get out of it, and generate additional cash for your account. When a trade turns unfavorable, you are stuck with it. When it closes out at a loss, you are weakening your account and day trading business.
Stop-Loss and Take-Profit Orders
Written plans can be as simple as entry points, expected time in the trade, and exit points. You can take the written plan one step further by setting a stop-loss order and a take-profit order at the time of the opening of the trade. Setting a stop-loss order is when you precalculate the maximum loss you would take in the trade before your trading platform places an automated closing out of the trade, thereby placing a limit on the percentage and dollar amount of the potential loss of the trade.
A take-profit order is the exact opposite: you enter in beforehand the amount of profit in percentage or dollar amount that you would like to make on the trade. When the security meets the price level that is required to meet your preset profit amount, your trading platform will automatically close out the position, and lock in your gains. Both stop-loss and take-profit orders are keys to planning a trade, and are very good tools to use in effective active risk management of your day trading account.