Picture a trade that moves against you. The price falls below your entry, and you have to decide, right then, whether to exit or wait. If no rule was written down beforehand, that decision gets made under pressure, with the price moving on the screen. A trading plan exists to make that decision before the pressure arrives.
A trading plan is a short list of rules written before you enter a trade. Its core is the stop-loss, a price you set in advance and exit at if the trade has gone wrong. The rest of the plan covers the target, the reward-to-risk ratio (how much you aim to gain compared with what you could lose), and position size (how many shares you buy). The numbers in this article are hypothetical. They show the arithmetic and are not for copying into real trades.
What the plan has to answer
Before you place an order, the written plan should state:
- Entry reason: why this trade, in one or two sentences.
- Entry price: the price you expect to buy at.
- Stop-loss: the price at which the idea is proven wrong.
- Target: the price at which you take profit.
- Reward-to-risk ratio: the target’s distance from entry compared with the stop-loss’s distance.
- Position size: the number of shares, set from the amount you accept to lose.
- Maximum loss: the amount you lose if the stop-loss is hit, before costs.
- Review rule: when and how you will check the trade afterwards.
None of these items needs a prediction of where the price will go. Each one asks you to decide in advance what you will do if the price moves against you, and what you will do if it moves in your favour.
Set the stop-loss before you enter
The stop-loss should sit where your reason for the trade no longer holds. If the price reaches that level, the idea has been tested and found wrong, and the exit is a planned, small loss rather than a hope. Placed too close, the stop may be triggered by ordinary price movement. Placed too far, the loss grows before you act. The right level comes from the reason for the trade, not from the amount you would like to lose.
Set the stop before you enter, and do not move it mid-trade to avoid a loss. Moving the stop further away after the price has fallen is one way a plan breaks down, because it turns a planned loss into an unplanned one.
A trailing stop moves up as the price rises, so some profit can be kept if the price turns. Check with your broker whether it is available to you.
Reward-to-risk: the target against the stop
Take a hypothetical trade. The entry is S$10.00, the stop-loss is S$9.50, and the target is S$11.00. The risk per share is S$0.50 (S$10.00 less S$9.50). The reward per share is S$1.00 (S$11.00 less S$10.00). The reward-to-risk ratio is 2:1: for every S$1 you risk, the target offers S$2 of gain. Some sources write the same ratio as 1:2, risk first, so check which order a source uses.
For any trade you buy, the steps are the same: subtract the entry from the target to get the reward, subtract the stop-loss from the entry to get the risk, then divide the reward by the risk.
A common convention is to look for a reward-to-risk of at least 2:1 before entering. Treat this as a rule of thumb, not a requirement. A plan can set a different minimum, as long as the minimum is written down and applied the same way each time.
Why the ratio alone does not decide
A ratio tells you how the payoff compares with the risk. It does not tell you whether the trade will work, so the win rate matters too.
The break-even win rate is the share of trades you must win, before costs, for the total result to be zero. It depends only on the ratio. If the reward-to-risk ratio is written as a single number (2 for 2:1), the formula is:
break-even win rate = 1 ÷ (1 + reward-to-risk ratio)
- 1:1 ratio: 50%
- 2:1 ratio: 33.3%
- 3:1 ratio: 25%
- 4:1 ratio: 20%
Here is a hypothetical run. Suppose you take 100 trades at 2:1, risking S$100 on each to aim for S$200. If 40 win and 60 lose, the 40 wins make 40 × S$200 = S$8,000. The 60 losses cost 60 × S$100 = S$6,000. The net is S$2,000 before costs. A 40% win rate is above the 33.3% break-even for a 2:1 ratio, so the total is positive before costs in this example. Change the win count to 30 and the same ratio loses money before costs.
Costs matter. Fees, spreads and slippage all reduce what you keep. A spread is the gap between the buying and selling prices, and slippage is getting a worse price than you expected. Leave them out of your plan and the numbers will look better than they are.
Position size from a fixed amount at risk
Position size is set from the amount you are willing to lose, not from the cash you have or the gain you hope for. The formula is:
position size = amount at risk ÷ risk per share
Take a hypothetical account of S$10,000 and an amount at risk of S$100, which is 1% of the account. The 1% is only an example. Choose your own amount; this article does not recommend a percentage. Using the risk per share from the earlier trade (S$0.50), the position size is S$100 ÷ S$0.50 = 200 shares. If the stop-loss is hit, the planned loss is S$100 before costs.
The stop and the position size are linked. With the same S$100 at risk, a stop-loss S$1.00 below entry would allow only 100 shares. A wider stop means fewer shares; a tighter one means more. Check the trading unit for the stock before you order, as set out in the next section.
Singapore checks before you place an order
These are the Singapore-specific points to check before any order:
- CPF. CPF funds can be used to buy SGX-listed shares only if the shares are approved under the CPF Investment Scheme (CPFIS) and meet its criteria. Read CPF’s own guidance for the current criteria. Rules can change, so do not rely on older summaries.
- Board lot and tick size. The board lot is the minimum trading unit, and the tick size is the smallest price step. Confirm both on SGX’s official pages before you place an order. This article gives no figures for either, because you should take the current values from the source on the day you trade.
- Stop-order types and fees. Ask your broker which stop-order types are available on your account and how each one works. Ask for the full fee schedule as well, and put those fees into your numbers.
Making the plan followable
Write the plan on one page and fill in every field. Here is the hypothetical trade above, filled in, with the entry reason left for you to write:
- Entry reason: one or two sentences, written before you enter.
- Entry price: S$10.00
- Stop-loss: S$9.50
- Target: S$11.00
- Reward-to-risk ratio: 2:1
- Position size: 200 shares
- Maximum loss: S$100 before costs
- Review rule: after the trade closes, compare it with the written plan and note whether each rule was followed
After each trade, answer three questions in writing. Did the trade follow the plan? Was any exit decided by emotion rather than by a rule? What should the plan say next time? Writing the answers turns one trade into a lesson.
Three ways a plan can break down:
- Moving the stop-loss further away during the trade.
- Setting a target with no stated reason, so the number is picked in the moment. Ask what would have to happen for the price to reach it.
- Dropping the plan after a loss, or trading outside it to win the money back.
Closing
A plan you can follow is short, written before the trade, and checked after it. Practise the arithmetic on hypothetical numbers until the stop-loss, the reward-to-risk ratio and the position size feel routine. Then add the Singapore checks to every plan before you order.
If you want more structured learning, a stock trading course in Singapore is one option to look into, but nothing in this article depends on it.
This article is general education only. It is not financial advice, and it is not a recommendation to buy, sell or hold any investment. Your own goals, finances and tolerance for risk matter, and the rules set by SGX, CPF and your broker apply to you. Consider speaking with a licensed financial adviser before you invest.
