After determining what tool (whether fundamental or technical analysis) the trader would use, the trader should then create a solid trading plan before entering the markets. Here are 4 key items that a trader needs to address when plotting a trading plan (still a part of your comprehensive analysis):

1. Time Frame

If the rule of your trading plan states that you should close your position within the day.  You have to stick with that rule.

2. Position Sizing

Position sizing determines the percentage of your portfolio or capital that you are willing to risk in your trade. Traders should have proper position sizing rules when entering a trader.  A lot of investors miss this aspect of trading/investing.  The initial percentage of exposure most new traders/investors would set is most often 100% of capital - "all-in".  In addition, these traders after experiencing a winning trade, again expose the full capital plus earnings on their second trade and vice versa.  The advantage to this system is that you get the most out of your money and earnings - if you win all the time. The downside to this size of exposure is the amount of loss one can get with a very bad trade. It is seldom the case that the stock you choose always wins.

There are various ways on how to divide your portfolio/capital.  Ideally, you divide your portfolio into 4 different trades wherein each stock in your trade should fall under a different industry or sector.  For example, one stock is under oil, second under services, third under realty and last under financial.  This diversification minimizes the risk involved in trading.  The beauty of diversification is that it allows you to recuperate your loss in one stock by earning from the other.

Dividing your portfolio to more than 4 is an acceptable practice, however, having more than 4 stocks can be difficult to monitor.  It is difficult to give simultaneous judgement calls on 8 different stocks, for example, when the market is moving.  Although this practice allows lower risk because of diversification, the added downside would be small earnings from small sized positions.

Another technique to position size your trade in one stock is to subdivide your entry into several parts.

3. Cut Loss Point

As previously mention, not all trades can be successful.  There are times when your trade will go against you and you should be ready to cut your losses once your trade starts to bleed. 

Setting cut loss points come in various styles.  Some make use of percentage value to trigger their cut loss, for example 3%, 5%, or 7% of loss and so on.  Others who trade using technical charts may make use of trend lines, percentage retracements, etc.   Any cut loss style is applicable as long as the trader finds it comfortable to use and is willing to follow it - no matter what.   

In general, the bigger the percentage value of cut loss you employ, the higher appetite for risk you have.  Having tighter stops - smaller percentage cut loss points - means that you are employing stricter risk management standards.  There are advantages and disadvantages to having tighter cut loss points.  While the advantage is obvious - smaller capital losses, the disadvantage is the tendency of getting shaken out with the stock's volatility.  Suppose that you employed a strict cut loss point of 2%. After buying a stock at 40, the stock the following day goes down to 39 which is more than 2% loss.  You sell the stock to avoid further losses since you were disciplined to follow the 2% cut loss point you have set.  However, the following day, the stock rises to 41 and you got left out. Sometimes, there are periods that a stock and the market in general is very volatile.

Shake outs do happen a lot .  This can be really frustrating for the trader and the lack of emotion management can lead to emotional trading that can affect succeeding trades.

4. Target Profit

Target profit is the point when you close your position and take profits.  It should be pre-defined before you enter your trade.

Target profits can be computed based on percentage rates, 5%, 10%, and so on.  For technicians, they compute targets based on pattern formation in charts.  For fundamental investors, targets are computed based on analysis of financial records of the company. Similar to the time frame example above, traders should control their greed and should strictly follow their set target profits.  We commonly hear a lot of traders who were already up 40% but were unable to profit as they were hoping for higher returns.  They eventually lost money as the stock fell the following days/weeks. 

These 4 key items should always be pre-defined prior to any trade or investment execution.  Setting these parameters or rules helps develop firm decision-making, reduces the likelihood that emotions would affect your traders and avoids the sense of uncertainty in your actions. There are a lot of books you can buy to further learn about this. There is no one correct system as the system also depends on the traders mentality and emotional disposition.