Anatomy of a trade plan

Lesson six: anatomy of a trade plan. Once a trade is open and the price is moving, clear thinking gets hard. A trade plan makes the big decisions ahead of time, while you're still calm. In this lesson, you'll build one, line by line.

Every plan answers five questions. Where do I get in? That's the entry zone. Where am I wrong? That's the stop. Where do I take profit? Those are the targets. Is it worth it? That's the reward to risk. And what would cancel the whole idea? That's the invalidation, written as a "Wrong if" line. Let's fill them in with one example. Say Bitcoin, on the four-hour chart, has broken through resistance around $60,000, and is now pulling back to it.

Start with the entry. Notice it's a zone, not a single price. Old resistance often becomes new support, but rarely to the exact dollar. So the plan says: buy between $59,800 and $60,200. If price never comes back to the zone, there's no trade, and that's fine. For the numbers, we'll use the middle, $60,000.

Next, the stop. The stop isn't the most you can stand to lose. It's the price that proves the idea wrong. Our idea is that buyers will defend this zone. If price falls right through it, they didn't. So the stop goes below the zone, with room for a normal wick, at $58,800. That's $1,200 below entry, or two percent. It's the same trade you sized in lesson five. One percent of a $10,000 paper account is $100 of risk. With a stop two percent away, the position is $5,000.

Now the targets. A target goes where the market has a reason to push back, usually the next resistance above. The recent high, $62,400, is target one. The old peak from last week, $63,600, is target two. Pick them from the chart first, before you work out what ratio they give you.

Is it worth it? Reward to risk compares the two distances. From entry to target one is $2,400. From entry to the stop is $1,200. Divide the reward by the risk, and you get two to one. We check it against target one, the nearer target. To target two, it would be three to one. At two to one, you can be wrong twice and right once. Lose $100, lose $100, win $200, and you're back to even. So you only need to be right about one time in three to break even, before fees. Now, the trap. Drag the target up to $66,000, and it suddenly looks like five to one. But the market doesn't care about your ratio. The target comes from the chart. The ratio is only the check.

The last line is the invalidation. The stop is a price. The "Wrong if" line is the reason, in words. For this plan: wrong if a four-hour candle closes below $59,800. That would mean buyers lost the zone. And it can happen before the stop is ever touched. Say a candle closes at $59,300. That's below the zone, but still above the stop. The idea is already broken. If you're in the trade by then, you don't have to wait for the stop. Lesson nine covers what to do next.

A plan only helps if you write it before the trade. So write it down, even for a paper trade, and note the time. If you can't fill in all five lines, there's no trade. Bentley writes its setups the same way. In its public market report, each one shows an entry zone, a stop, targets, the reward to risk and a "Wrong if" line. Write your own plan first, then compare it with Bentley's. Treat each setup as a plan to test on paper, not an order to follow.

Let's recap. A trade plan answers five questions before you enter. The entry is a zone, not a price. The stop is where the idea is wrong, and it sets your size. Targets come from the chart, and reward to risk checks if the trade is worth it. The "Wrong if" line says what cancels the idea. In the next lesson, market regime: when not to trade. And remember, this course is education only, not financial advice.