What does a trade plan do?
A trade plan is a framework an investor creates before placing a trade. Rather than focusing only on entering a buy or sell order, a trade plan helps organize the investor’s own objectives, strategy, and risk considerations in advance.
A trade plan doesn’t tell you what to invest in or guarantee investment results. Instead, it provides a structured way to think through important decisions before placing an order.
How is a trade plan different from placing an order?
Imagine you’ve decided you would like to purchase shares of a company.
Placing an order tells the market what transaction you want to execute. A trade plan documents the decisions you have already made before placing that order.
Depending on your own investment objectives, a trade plan may include:
- Why you are considering the investment.
- The type of order you intend to place (for example, a market or limit order).
- The number of shares or investment amount you have decided to purchase or sell.
- The circumstances under which you may choose to sell or reduce your position.
- The risks you have considered before placing the trade.
Why do investors use trade plans?
Many investors prefer to think through important decisions before entering the market. Documenting those decisions in advance can help maintain consistency with their own investment objectives and reduce emotional decision-making during periods of market volatility.
Some brokerage platforms, including Longbridge, may offer optional trade planning tools or templates that customers can choose to use when organizing their own trading decisions. These tools are intended to help customers document and organize their plans. The decision whether and how to use them remains with the customer.
A trade plan does not predict market performance, guarantee investment results, or eliminate investment risk. All investing involves risk, including the possible loss of principal.