Trading: write the risk before the trade

Turn an idea into a testable plan

State the instrument, time horizon, reason for the idea and the evidence against it. Define the conditions for entry, invalidation and exit. A candle shape by itself is not a complete method; neither is a macro stress score.

Paper trading can help practise a process, but simulated fills often miss real spreads, queues, slippage and emotional pressure. Test rules on unseen data and keep a record of changes rather than repeatedly tuning them to past winners.

Calculate exposure in units

Hypothetical shares example: an entry at £100, an invalidation level at £98 and a £50 planned price-risk budget imply 25 shares: £50 ÷ £2. This is a worked calculation, not a suggested trade or risk allowance.

Fees, currency conversion, gaps and slippage can make the loss larger. Futures and options need their own contract-value calculations. Short positions add borrowing and recall risks; a short's potential price loss has no fixed upper limit.

Know what an order can promise

A market order prioritises execution, with an uncertain price. A limit order sets an acceptable price but may never fill. A stop order becomes a market order when triggered; the stop level is not a guaranteed exit price. A stop-limit can leave you in a falling position if its limit prevents execution.

• Record expected and actual fills, fees and slippage.
• Measure average win, average loss and losing streaks alongside the win rate.
• Keep a process journal, including valid decisions that lost money and poor decisions that happened to win.