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Invalidation and the full plan

Seven fields, written before the next candle. · 8 min

Decide first

You buy a pullback in an uptrend, stop beyond the swing low. Which is an invalidation, the event that says the idea is wrong before the stop is even hit?

A trade plan is complete when someone else could execute it without asking you a question. It has seven fields, and all of them are written before the next candle:

  1. Side: long, short, or stand aside.
  2. Entry: order type and price.
  3. Stop: by structure, checked against ATR.
  4. Target: from structure, expressed in R.
  5. Invalidation: what on the chart proves the idea wrong, even before the stop.
  6. Size: from the account risk and the stop distance.
  7. Time: how long the idea has to work before you close it anyway.

The invalidation is the field most traders leave out. A stop is a price; an invalidation is a reason. "An hourly close back below the pullback low" lets you exit a dead idea early, for less than 1R, instead of waiting for the market to take the whole stop.

Below, every field is required. The coach checks the plan, and only a plan with no fixes left can be locked. Then the future is generated and played against it.

Plan this chart

Simulated data · not real prices
Drag the lines on the chart, or use the buttons. Last close 105.92 · ATR(14) 0.62
Entry
Market order at 105.92
Risk per unit
1.07 (1.73 ATR)
Reward to risk
2.00R
Break-even win rate
33.3%
Size at 1% of $25,000
—

Fills at the next open, plus one tick of slippage.

Coach

  • Note: The target lies beyond the resistance at 106.62, which price has to break first. A target just before it is reached more often.
  • Fix: Write what would prove the idea wrong before the stop is hit, for example "a close back below the breakout level".

Worked example: a complete plan for the chart above

  1. Side: long. The swing highs and lows are rising and the pullback has turned up.
  2. Entry: market order at the close, 105.92 (it fills at the next open).
  3. Stop: beyond the swing low at 104.91 with a buffer of 0.06: 104.85, a risk of 1.07 (1.73 ATR).
  4. Target: the last swing high is 106.62, only 0.65R away. Either take 2R at 108.06 and accept that price must break that high, or stand aside.
  5. Invalidation: an hourly close below 104.91.
  6. Size: 1% of $25,000 = $250; 250 ÷ 1.07 = 233 units.
  7. Time: five sessions, then close at market.

Common mistake: the plan written after the entry

A plan that changes once the trade is open (a stop moved away from price, a target raised after a good candle) is not a plan; it is a story about the candles you have just seen. If new information really changes the idea, close the trade and write a new plan.

Check yourself

  1. The plan has side, entry, stop and target, but no size. Account $10,000, 0.5% risk, stop 1.2 away. Fill in the size.
  2. You buy a breakout above resistance at 57.01. What invalidates it?
  3. Three journal entries for the same long at 134.34. Which plan was changed after the entry?

Closing round

Write all seven fields on paper before each trade, then trade only that plan. The market is a mystery: you find out which one it was at the review.

Play the round in the simulator →

The simulator's markets are generated, not real prices; the round practises the arithmetic, it does not predict anything.

Further reading: Tharp, Trade Your Way to Financial Freedom. The lesson teaches the idea in its own words and exercises.