I was talking to someone about trade planning during the week. To demonstrate, here is a completely gratuitous chart of ARU to show how I might go about a trade plan. I am not saying any of this will come off, and it is not a forecast, or a tip. It is an example of one way to construct a plan.
It is a graphical representation of one of the possibilities for one of the ASX equities. If, in a couple of weeks, price seems to be following the patterns I have set out, I might conclude that I guessed correctly, and re-evaluate whether the draft trade idea was still valid. If it was, I might enhance the plan with a risk reward calculation, and based on that, a position size calculation.
A rough example would be IF I decided to go for an entry at 50c AND I set my stop loss at 45c AND I set my profit target at the light green ML, conservatively around 82c, that would give me a RRR of 6.4 which is above my acceptable limit of 5.
If the maximum amount I am prepared to lose on this trade is say $600, The position size is calculated as $600 divided by (Entry - Exit = 5c), which also happens to be 600*20 or 12k shares.
Obviously if the amount I am prepared to lose is different, or my entry or exit plans change, my position size calculation should relect this.
Also, any one who is interested in this sort of thing (which IMHO is the fun part), I refer you to BrisVegas excellent post on the subject over on XJO
