There are three major considerations when a trader plans a trade - stock selection, overall market conditions and a specific plan of action. Navigating market conditions and picking a good stock will have a major impact on trading outcomes but it is the actual trading of the individual stock you choose that will determine if you have run-of-the-mill results or superior returns.
Once you choose a stock and determine that market conditions favor the trade the first step in the trading plan is the entry point. One of the most common mistakes that traders make is that they have a strong emotional reaction if a trade doesn't work immediately and overact. It is disappointing when your carefully chosen stock immediately declines right after you buy it and often times we are inclined to call it a mistake, dump it and then move on. We are much more likely to question our judgment when a stock doesn't do what we want right away and that is because mentally we haven't given ourselves enough room for error.
The best way to deal with this is to focus less on a specific entry point. Look for a range in which to enter and then make several buys to build the position. Give that first buy room to work and be mentally prepared to add lower or higher.
If you have read my columns over the years then you know that I am a big fan of incremental buying and selling. The best way to enter a stock is with several small buys and the best way to exit is with a number of sales. This approach has two big benefits. First, it helps to get you the best average entry and exit points, and it provides a form of diversification because you are trading in a variety of different time frames. Some of the stock will be a short term trade and another portion is a longer term trade. With commission rates so low there is no real cost to trading in this manner.
Once you make an initial buy of a stock then the next step is to determine where you would make an additional buy and at what point you would determine the trade was a mistake and exit. It is extremely important to do this in advance so that you can stay objective and avoid emotional reactions. If you actually are looking to buy more shares at a lower price when you enter then you are going to welcome a pullback rather than fear it.
As you build that position you then have to work on the second part of the plan which is the exit. There always should be a stop in place because our paramount goal is to always protect capital and stay in the game. No matter how much conviction you may have, you have to cut a stock at a certain point to avoid impairing capital.
If you are using an incremental approach then that should apply to stops as well. Put tighter stops on a portion of the trade and give another portion more time to work. If you take a partial stop, you can always buy the stock back.
When you catch a winner there are many ways to ring the register. I will often sell a portion into strength and then use several different trailing stops for the remainder depending on the various time frames I'm using. Selling into strength can work very well if your timing is good but a traiing stop allows you to better ride strong momentum that is hard to measure.
Once you exit some of stock then you can start to consider if you want to buy it again. I typically will have a group of stocks that I keep coming back to and trade over a longer period of time. It is helpful to become familiar with the story behind a stock and the way it moves. Individual stocks have their own personality and it very helpful to know it well.
The biggest mistake most traders make is that they think in terms of a single buy and a single sale. That can work well if you have good stock selection but a trading plan that uses a variety of buys and sells is the way to really maximize gains.
When you stop being overly precise with entries and exists it becomes much easier to catch the meat of the move with more aggressive size. That is how you produce superior returns.