One of the first things that I did when we began teaching students was understanding what their goals were. Not everyone is meant to be a full-time trader and that's perfectly fine. However, everyone of us can learn to better part-time investors and traders by managing our own assets. We ask each student what their goals are and of course the main answer is always to make money but some students just want to learn to manage a portfolio or to learn to swing trade options for additional cash flow. The first question I ask is, 'What is your plan and if you don't have one why have you not created one?" 90% of the time students simply do not have one. They take trades and have no exit for that trade in mind, very scary.
The part of their plan they always lack is an understanding of where market turning points are, or where to buy and sell. This is the very first building block we teach all students regardless of skill level in the Core Foundations of Trading Class (CFOT). The markets turn at certain levels and they do it time and time again and we find those levels on the price chart. When we can identify these areas we can begin to take less, higher-probability trades.
S&P 500 E-Mini Trade Set Up - 11-10-16
The above chart is that of the E-Mini S&P500. The circle to the left was a past level of resistance the market saw on Tuesday evening during the election where the market sold of near $100 points, so, a level of significance. The level or resistance at $2178 was a short entry with a target at the past level of resistance at $2150. Now before this trade occurred we've determined a level of resistance and a price are where we want to take our profits. This is a key risk management tool that is often overlooked.
This is an absolute must for a few reasons. One, it helps us determine what the risk and reward is, is the juice really worth the squeeze? Second, it allows us to mentally prepare for the trade and most important, have a plan. One of our students took a 2 lot contract short and netted $725 on the trade covering one for profit then leaving an additional for a bit more.
While he ended up taking profit 'early' on the trade the $2150 demand/support zone target was reached. One of the most important parts of trading is the individuals plan and while he assessed the risk v. reward pre-trade his daily profit target is $400 so when he was at $725 it was close to double and therefore justified him taking profits.
So while the core of buying and selling any asset class is understanding when the asset is overpriced or under priced, it is still almost as important to have a plan for what to do when a transaction is made. This is just another step we use as investors to gain an edge in the markets over the institutions.
I hope this was of help.