The Trade I Planned in Full — and the One I Did Not
I have kept a trade journal for several years. At some point early on, I went back and classified every trade into one of two categories: trades where I had written down the entry, stop, and first target before placing the order, and trades where I had entered with only a general sense of where those numbers were.
The results were not subtle. The planned trades — the ones with all three numbers written before entry — produced an average gain of 8.3% when they worked and an average loss of 2.1% when they did not. The improvised trades produced an average gain of 4.1% when they worked and an average loss of 5.8% when they did not.
The difference was not the quality of the setups. Planned and improvised entries came from the same watchlist, the same analysis process, the same sector conditions. The difference was whether the exit decisions had been made before the trade was open — when the thinking was clear and the money was not yet at risk — or whether they were being made after the trade was open, when every subsequent price movement created a reason to deviate from what should have been a predetermined plan.
Three numbers, written before entry. That was the entire gap between 8.3% average gain and 4.1% average gain, between 2.1% average loss and 5.8% average loss.
The Three Numbers — What Each Is and Where It Comes From
The entry price is the Breakout Level — the upper boundary of the consolidation drawn from closing prices. The position is opened at or within 5% above the Breakout Level. Beyond 5%, the risk-to-reward calculation changes unfavourably and the entry is no longer valid at the current price. The entry is not a guess at where the stock will go — it is a specific structural price level that the stock has just confirmed by closing above it on above-average volume.
The stop loss is placed just below the Support Level — the lower boundary of the base. This is the price at which the breakout thesis is invalidated. If the stock falls back through the Support Level after breaking out, the base has failed. The breakout was false or the market has changed. The stop is not placed at a comfortable percentage below the entry. It is placed at the structural level the chart defines. Comfort has nothing to do with it. The chart defines where the thesis ends.
The first target is calculated by measuring the base height — the distance from the Support Level to the Breakout Level — and projecting that same distance above the Breakout Level. If the base runs from $62 to $72, the base height is $10. The first target is $72 plus $10 equals $82. This projection does not guarantee the stock reaches $82. It establishes the structural minimum expected advance if the breakout is genuine — and it produces the reward side of the risk-to-reward ratio. For illustrative purposes only.
Worked Example — All Three Numbers from the Chart
The example above is instructive precisely because the ratio fails. The Monday open of $73.20 — 1.7% above the Breakout Level, well within the 5% window — produces a risk-to-reward ratio below the minimum. The wide base (running from $62 to $72 is a large range) combined with the entry slightly above the Breakout Level produces a risk per share that is larger than the reward per share.
This is the calculation telling the investor not to enter at this price. Not because the setup is wrong. Not because the stock is bad. Because the geometry of this specific base at this specific entry price does not produce a ratio that justifies the risk. The correct response is to wait — for the base to tighten, for the Support Level to rise, for the risk per share to compress — until the ratio clears 1:2 before the entry is taken.
A structural engineer does not build a bridge to a specification that assumes the bridge will never experience maximum load. The bridge is designed for the worst-case load — the maximum weight of traffic it will ever carry — with a safety margin built in above that. The structure is determined by the load it must survive, not by the average conditions. Position sizing in a breakout trade works identically. The stop loss placement is not designed for the average scenario where the trade works. It is designed for the worst-case scenario where the trade fails immediately. The maximum loss is capped by the stop placement and the position size formula. When the worst case arrives — and it does arrive, repeatedly, in any active trading strategy — the position size keeps the damage within the predetermined maximum. The bridge does not collapse because the design accounted for the maximum load before the first rivet was placed.
Same stock, same Breakout Level, same first target. The support rising from $62 to $68 compresses the risk from $12.20 to $5.20 while the reward remains constant — flipping a failing ratio to a qualifying one. For illustrative purposes only.
The three numbers are not bureaucracy. They are the decisions that keep losses small when the trade fails — and they must be made before the order is placed, not after the position starts moving.
What Happens After the Position Is Open
Once the entry is placed and the stop is set, the position management follows a simple rule: the stop only moves up — never down. As the stock advances, the stop is raised progressively to protect the accumulated gain. The stop never returns to a lower price, regardless of how much the stock pulls back intraday or how anxious the move makes the investor feel.
The first meaningful stop raise occurs when the stock closes above the first target level. At that point, the stop is raised to just below the Breakout Level — the original entry zone. The position is now in a condition where, if stopped out, the trade breaks approximately even or produces a small gain, depending on the exact entry price and stop placement. The risk of a loss from the original entry has been essentially eliminated.
Subsequent stop raises are triggered by the stock forming new bases at higher levels — exactly as Darvas described. Each new base produces a new Support Level above the previous one. The stop is raised to just below each new Support Level. The position is held as long as the stock keeps forming new bases and breaking out of them. It is exited when the stock closes below the most recent Support Level on a given week's close.
The exit is not a decision made in the moment. It is the predetermined outcome of a predetermined rule. The three numbers written before entry set the parameters. The stop-raise protocol after entry maintains them. At no point does the investor need to decide whether to stay or go based on how they feel — the chart and the rules make the decision.
→ How to Confirm a Stock Breakout Before You Buy
→ How to Assess Risk and Reward Before Entering a Trade
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Send Me the Friday FlashFrequently Asked Questions
The stop is raised from below the Support Level to below the Breakout Level when the stock has advanced to or beyond the first target. At that point, the original thesis has been confirmed — the base height projection has been reached, meaning the breakout has done what it was expected to do. Raising the stop to below the Breakout Level protects the majority of the original expected gain while keeping the position open for potential continuation. The exact timing varies slightly by position: some investors raise the stop at 80% of the first target to lock in a partial gain earlier, while others wait for the full first target to be reached. Either approach is valid as long as it is predetermined and applied consistently. Past performance does not guarantee future results.
Yes — if the stock has clearly closed well above the first target, the stop raise protocol applies regardless of whether the move was driven by earnings or regular price action. However, earnings gaps require additional care: the stock may gap significantly above the target on the earnings day and then pull back substantially over the following week as the initial enthusiasm fades. If the gap-and-pull-back takes the stock back below the previous target level, the stop should not be lowered to follow it down. The stop that was raised above the Breakout Level stays in place. If the pull-back triggers the stop, the position is exited. The earnings gap confirmed the original thesis — the stock reached the target. That outcome is locked in by the raised stop.
There is no predetermined second target in the same way the first target is calculated. Once the first target is reached and the stop is raised, the position becomes a trend-following exercise — the stock is held as long as it continues making higher bases and breaking above them, with the stop raised to below each new support level. Some investors project a second target using a multiple of the base height — two times the base height above the Breakout Level — but this is more of a planning reference than a firm exit trigger. The structural exit signal, regardless of where the second target is projected, is a weekly close below the most recent raised support level. The trend-following phase has no mandatory exit price. It has a mandatory exit condition: the trend has ended, confirmed by the chart. Past performance does not guarantee future results.
The planned trades produced 8.3% average gain when they worked and 2.1% average loss when they did not. The improvised trades produced 4.1% average gain and 5.8% average loss. Same setups. Same analysis. Same market conditions.
The difference was three numbers written on a piece of paper before the order was placed. The entry, the stop, the first target. When those three numbers were already decided, the subsequent decisions — to raise the stop, to hold through a pullback, to exit when the stop was triggered — were not decisions at all. They were the execution of a plan that had already been made.
When those three numbers were not written down, every subsequent price movement required a fresh decision — made in real time, with capital at risk, under the influence of every cognitive bias that active trading produces. Those decisions were consistently worse than the ones made in advance, with no money at risk and a clear chart in front of a calm mind.
Amateurs make trading decisions while the position is open. The process-driven investor makes them before the order is placed — because that is the only moment when the thinking is clear enough to make them well.Every Friday — Three Numbers Calculated. Complete Trade Plans Published.
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