SaintsTradingPhase 3 · Lesson 5 of 8
Building a plan
Turn a conditional market idea into written rules for confirmation, invalidation, sizing, and review.
Confirmation is the observable price behavior required before an entry. Invalidation is the behavior that cancels the reason for holding a position. Position size is the quantity you trade, and a target is the first planned place to reassess or exit. A candle summarizes the opening, highest, lowest, and closing prices over a chosen interval.
Write the plan before you need it
A useful plan makes the next decision smaller. It tells you what you are waiting for, what would cancel the idea, and when you should do nothing. You do not need a prediction for every candle. You need a clear response to a few conditions near a relevant location. If your plan can justify buying, selling, and holding through any movement, it is not specific enough to guide you.
Start with usable evidence
Before writing a directional scenario, identify the session and verify that the required data is current and complete enough for the task. Dealers are firms that buy and sell contracts; their hedges are other positions used to offset risk. Flow means estimated buying or selling pressure from those adjustments. Record the last visible price and flow times, the status of the levels, and any missing opening history. A recent screen refresh is not proof that the underlying observations changed. If a required input cannot be trusted, your plan should say wait rather than attach a confident direction to uncertain evidence.
Next, write two separate labels. The gamma backdrop describes whether estimated dealer hedge adjustments could dampen a move by opposing it or amplify it by following it. Use mixed when the evidence conflicts. VWAP is the average price weighted by supplied volume, meaning reported trading activity; this viewer approximates it using each chart bar's midpoint, halfway between its high and low. Its inner boundaries are one standard deviation, a measure of price spread, above and below that average. Price between the boundaries is balance, above is discovery up, and below is discovery down. Keep one timeframe, meaning one duration per chart bar, when comparing those states.
Give the idea a location and a failure condition
A zone is a small area around a reference price. A pullback is a temporary move against the recent direction. Choose one nearby zone and the first relevant obstacle beyond it. You might study a lower balance edge near Put Wall, a reference marking heavy estimated holdings of put options, or a pullback toward the upper balance boundary during discovery up. A put's payoff increases when its underlying finishes below the specified exercise level at expiration, when the contract ends. The location narrows the question. A reclaim means price moves back across a zone and holds there. A rejection means it tests an area and moves away; a held retest means it revisits the area, stays on the intended side, and moves away again. You then define confirmation: the observable hold, rejection, or reclaim required before the idea becomes a paper candidate, a practice decision recorded without a real order. Choose the chart interval and required sequence before the test.
Write invalidation just as carefully. If your idea requires a reclaimed zone to hold, losing that zone and breaking the observed rejection low may contradict it. The exact protective process must be chosen before entry and suited to the instrument. You cannot keep the same plan by moving its failure point every time price approaches it. A stop is an order intended to trigger an exit at a specified condition. A new scenario requires a new assessment, not a quiet revision of the old stop.
Use Saints' limits as hard ceilings
Set a fixed, small per-trade risk limit and a pre-set daily loss limit, with defined risk preferred. Defined risk means a known maximum contractual loss for the complete position held as intended. These limits are ceilings, not targets. Your circumstances may require even less risk or no live trading. The position must also fit what remains of the daily allowance. A trade can fit the per-trade ceiling and still be too large for the rest of the day.
Illustrative only: if realized losses have used most of your pre-set daily allowance, a new position whose full possible loss plus costs exceeds the remainder does not fit, even if it is below your per-trade limit. Do not treat the next attractive setup as permission to reset the day. For these learning exercises, use a conservative budget that includes costs, open risk, meaning possible loss on positions still held, and realized losses, meaning losses on closed positions; do not use intraday gains to expand it.
Risk should be understood at the position level, including linked exposures. Two positions based on the same underlying move are not independent simply because they have different strikes, the contracts' specified exercise levels. The underlying is the market those options are tied to. For a beginner paper exercise, studying one candidate at a time makes the accounting clearer. Keep each practice position on its own line, then total their exposure. Whatever structure you study, a total-risk calculation must not hide exposure across separate orders.
Size from the possible loss, not the desired gain
For a purchased option, include the entire premium, meaning its purchase price, plus costs when evaluating possible loss. Do not assume a chart stop will always limit the loss to a smaller amount. For other defined-risk structures, understand the combined payoff, contract terms, and execution process before relying on the stated maximum. A leg is one contract component of a multi-option position. Separating legs or mishandling an exit can change the exposure. If you cannot explain the worst case, do not use the structure.
Choose the affordable risk first, then examine whether any valid size fits. If the smallest practical position is too large, the correct quantity is zero. Do not move the chart invalidation closer merely to make a larger position look affordable. A protective exit must make sense for the idea, while the financial exposure must make sense for your budget. Neither requirement disappears because the other is difficult.
Targets must leave realistic room
Name the nearest relevant reference in the intended direction, not the farthest attractive destination. Rotation means movement back toward an average or through a range. Magnet marks a strike around which price may spend time. VWAP can stop a rotation before Magnet. Continuation means resuming the recent direction after a pause. A nearby wall can stop that move before a more distant projected level. The bid-ask spread is the gap between quoted buying and selling prices; slippage is the difference between an expected execution price and the actual one. Include the spread, fees, and plausible slippage when deciding whether there is room. A visually large index move does not translate directly into the option profit you hope to receive.
An illustrative paper plan might say: price must reclaim a lower balance edge near an invented 5,000 zone where a decline might slow and hold a retest; the first target is an invented 5,020 average reference; losing the retest cancels the idea. Those round levels are invented, not current or historical prices. This is still incomplete without the contract, quote assumptions, timing, and cash-risk calculation. The chart plan and instrument plan must agree.
Journal decisions while they are still decisions
Record the evidence and rules before the outcome is known. Note the timestamp, data limitations, state, level scope (the options or reference set it covers), confirmation, invalidation, target, and risk allowance. Afterward, record what actually occurred, including skipped candidates. If a paper execution price was assumed, mark it assumed and explain the quote used. Do not let an attractive completed chart erase the fact that your confirmation never occurred in real time.
Review process and outcome separately. A planned loss can follow a valid decision, while a fortunate result can follow a rule violation. Ask whether your rules were clear enough for another person to understand, whether you changed them under pressure, and whether the evidence was available when you acted. That review helps you identify the next learning task without pretending that one session proves the method works.
Key takeaways
- A plan needs conditions for both participation and cancellation.
- Keep gamma backdrop and actual price state separate.
- The possible loss must fit both the fixed, small per-trade limit and the remaining pre-set daily allowance.
- Size from possible loss, including costs, rather than desired gain.
- Preserve original notes and review decision quality separately from outcome.
Self-check questions and explanations
1. In the illustrative budget example, does a position fit if its full possible loss plus costs exceeds the remaining daily allowance, despite fitting the per-trade limit?
Answer: No. Both limits must hold after costs and any open risk are considered.
2. What should you do if the smallest practical position exceeds the risk allowance?
Answer: Skip it. Do not invent a tighter chart stop to justify the size.
3. Why use the nearest relevant target first?
Answer: It is the first obstacle the idea must overcome, and it may leave too little room for the proposed risk.
4. When should you record confirmation and invalidation rules?
Answer: Before the outcome is known, with later changes documented rather than silently replacing the original plan.