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Plan a trade using Trade2Plan ...
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Choose Your Stock
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This article assumes that you have chosen your stock carefully and are now planning the trade. Primarily we are concerned with how much of the stock to buy, ie, position size, what price to buy and sell, and importantly what is our stoploss.
For the purposes of this articles the stock is PNA. It has been in a strong uptrend lately and we want to either add to our position or buy in for the first time.
On the 11 and 18/05/2007 PNA pulled back to retest 50c and bounced both times. So having decided to buy the day after the 2nd bounce we need to work out what our position will be.
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Calculate Your Position
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Using the Trade2Plan Trade Calculator we enter the following information, click thumb for screenshot.
It's a Long trade and we're trading CFDs. The Initial Margin for PNA is 25%, the RBA interest is currently set a 6.25% and average broker interest is about 3% (generally +3% for long trades and -3% for short trades). So for an estimated 10 days we're paying $56.77. (Note: Interest on overnight CFD positions are calculated daily, and are also calculated on a 365 day per year basis, so this means that when estimating night's held for a position the trader needs to factor in weekends as well, not just market days). The trade may not take this long, but the "Night's Held" is an estimate for the purpose of planning the trade with as much information as possible.
Our stoploss is placed at 49.5c as the 50c support was not breached on either date and the price has risen from 50c enough to make 49.5c a reasonable stop. So we decide to buy at 52c at market on open on the 21/05/2007. The gap up is also an encouraging sign that the market seems confident the day after testing the 50c level.
For the purpose of planning this trade we have set a target sell price of 60c. PNA actually broke through this target on 30/05/2007 (and, in fact, broke 70c on 06/06/07), and in this case we would consider holding the position and raising the stoploss, but again, for the purpose of planning the trade as a whole we'll set 60c as a target as it is a round number, and it's our minimum level of interest in the trade.
Next we need to calculate the brokerage cost. This can be done either by setting a dollar amount or a percentage. We have selected percentage, and Trade2Plan calculates the whole trade brokerage, ie, buy and sell. The risk on the trade is 2% of total capital (in keeping with the generally accepted 2% Rule). As you can see 2% of $50,000 is $1000, which is what we are prepared to lose on the trade should it turn against us. As the stoploss is set at 49.5c and we're buying at 52c the calculated position size is 40,000 CFD shares at 52c.
To summarise the risk position:
52c - 49.5c x 40,000 = $1000 + $45 (brokerage) + $56.77 (interest) = $1102 (rounded) is the risk on the position.
Note: If going short this trade, the interest is paid to the trader, and this would be reflected in the trade Risk and profit margin.
The other element when planning a trade using CFDs is that you have the advantage (depending on your perspective) of leverage. So the trader is only required to provide the initial margin, in this case 25%, or $5,200, however the risk amount is still calculated on Total Capital. But if you observe the lower part of the Calculator the Percentage Return on your contribution to the trade is greater than the trade as a whole, so you have actually used less of your own capital to make a larger percentage gain.
Having put in the figures, however, you are faced not only with the decisions about risk but you need to consider whether or not the trade itself is worthwhile given the Risk / Reward Ratio, which in this trade is 2.81. In other words, it represent an almost 3:1 return; you are risking 3 times less that what you will gain if the trade is successful. A 3-to-1 Risk / Reward Ratio is generally accepted as the minimum you would be looking for to make the trade worthwhile considering. And, of course you may also be measuring this trade against other potential trades. Also, it is very important when considering the Risk / Reward Ratio that you let the chart "do the talking" and don't try to manufacture stoploss, entry and exit prices just to manipulate the Ratio to higher than 3 to make it a worthwhile trade.
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Enter Your Trade
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Having decided on the trade, and having opened it, we can now enter the buy details of the trade into the our portfolio management software. The screenshot below shows the details of the trade.
We have selected the Stock Code, PNA, and the details of the this Code are filled out in the Trade Manager Screen. The first thing to do is enter the Trade Planning Notes, which serve as not only a reminder of the reasons for the trade, but also as an accountability factor for entering the trade. This example summarises the reasons given above.
Next we select the Instrument (CFDs), Trade Action (BUY), Quantity (40,000, from our calculations earlier is the position size), and entry Price (52c). Then Trade Date, Brokerage (this will be different to the calculation because in here the brokerage is only for the buy). The details of the trade at current are then shown below under the CFDs column.
You'll notice that the current P / L (Profit / Loss) is showing a loss for now as you have bought at 52c whereas the closing price from the previous day's trading was 51.5c (Trade2Plan does not show live market prices, but does provide EOD closing price each evening). This will change again when closing prices are updated, so you can monitor the trade at the end of each day.
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Exit Your Trade
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Let's skip forward to the sale of the stock on the 31/05/2007 as per the original trade plan to sell at 60c.
The trade went better than planned. We have been able to exit after the estimated 10 days at a higher price than initially targetted. The CFDs column below the trade details only shows the closed out position and the P/L compared the previous close, which is not the profit made on the trade. Normally these details would not be shown as the position would close out automatically for reporting purposes and not be viewed from the Trade Manager. For an account of the trade we need to look at the report below.
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Report Your Trade
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First we generate the Report Dates.
The Report below shows the details of the trade.
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Conclusion
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Not all trades go to plan, but all trades should be planned. The best way to give yourself every chance of surviving the market is to be disciplined and prepared for the outcomes whether good or bad. This trade happened to go better than planned, and apart from the example we would more likely have trailed the stoploss than sell out for the price we did. At the time this article was concluded the price of PNA was around 74c.
In summary, then, the trader will select stocks to trade, work out the stoploss price from the chart, then using this as the basis with the 2% Rule calculate the risk and position size. Doing the preparation does not gaurentee a successful trade but it will give you confidence that you have at least done your part in the preparation process and can enter the trade with that same confidence. If the trade goes against you, … that's trading, if it goes to plan, then that confidence will only grow, you'll have made a profit, and importantly you may well have set in place the elements of a profitable system that will keep you winning in the market for years to come.
Ian McIvor
Admin :: Trade2Plan
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