Building a Technical Analysis Trading Plan

Technical analysis only works within a structured trading plan. This lesson puts everything together into a systematic approach for using technicals in real trading. [DEFINITION] Trading Plan: A comprehensive set of rules covering entry criteria, exit criteria, position sizing, and risk management that guides all trading decisions. ### Components of a Technical Trading Plan **1. Market/Stock Selection:** What will you trade? - Universe of stocks (S&P 500, specific sectors, etc.) - Screener criteria (minimum volume, price range) - Time frame focus **2. Entry Criteria:** When do you enter? - Specific patterns or setups - Indicator confirmations - Time frame alignment requirements **3. Exit Criteria:** When do you exit? - Stop-loss rules (ATR-based, support-based, etc.) - Profit targets - Time-based exits **4. Position Sizing:** How much do you risk? - Fixed dollar risk per trade - ATR-based sizing - Maximum position size **5. Record Keeping:** What do you track? - All entries and exits - Reason for trades - Performance metrics [TIP] Write your plan down. A plan in your head changes with emotions. A written plan provides discipline. ### Sample Technical Trading Plan [EXAMPLE] **Trend Following Swing Trade Plan:** **Selection:** S&P 500 stocks only, minimum 1M daily volume **Entry Criteria:** - Weekly chart above 20-week MA (uptrend) - Daily pullback to rising 50-day MA or previous resistance - RSI(14) below 40 (oversold in uptrend) - Bullish candlestick pattern at support **Exit Rules:** - Stop: 1.5 ATR below entry or below 50-day MA - Target 1: 2:1 risk-reward (sell half) - Target 2: Next major resistance (sell rest) - Time stop: Exit if no progress in 10 days **Position Sizing:** - Risk 1% of account per trade - Position size = 1% of account ÷ stop distance ### Backtesting Your Plan Before trading real money: [KEY] Backtest your plan on historical data. Look at 50-100 historical setups and calculate win rate, average win, average loss, and expectancy. **Questions to answer:** - Does this setup occur often enough? - Is win rate acceptable? - Is risk/reward positive? - Does it work in different market conditions? ### Common Mistakes to Avoid [WARNING] Technical trading plan pitfalls: - Too many indicators (analysis paralysis) - No clear rules (vague entry/exit) - Changing plan mid-trade (emotional trading) - No position sizing rules (random risk) - Not tracking results (no improvement) ### Adapting to Market Conditions Your plan should have modes: - **Trending mode:** Trade with trend, wider stops - **Ranging mode:** Trade support/resistance, tighter stops - **High volatility mode:** Reduce size, wider stops - **Low volatility mode:** Prepare for breakout [EXERCISE] Create entry criteria for a simple technical setup. Include: time frame, trend requirement, specific pattern, indicator confirmation, and volume requirement. |ANSWER| Example: Daily chart, stock above 50-day MA (uptrend), pullback to 50-day MA forming bullish engulfing candle, RSI crossing up from below 40, volume above average on engulfing day. This combines trend (MA), price action (pattern), momentum (RSI), and volume for confirmation. [SCENARIO] You've developed a plan and backtested it—looks profitable. You start trading and hit 5 losses in a row. Do you abandon the plan? Not necessarily. Even good systems have losing streaks. If you backtested and the system had a 50% win rate, losing 5 in a row will happen eventually (about 3% probability for any 5-trade stretch). Review the trades—did you follow your rules? If yes, continue. If you deviated, that's the problem. Only modify the plan based on significant sample sizes, not short-term results.