Trading Plan

08.14.07 - 09:55am

How many of you have actually traded ‘live’ WITHOUT a Trading Plan in place? I’d venture to say that more than 50% of new or existing traders execute trades in the markets without a solid trading plan in place. A ‘Trading Plan’ is the single most important item you could have in your portfolio. Trading Plans allow you to monitor your trades with a specific set of goals in mind. No guesswork involved, just solid planning and execution.

How do I create a Trading Plan? What is contained in a Trading Plan? Is it hard to create one?

Here is Criteria for a Trading Plan…..

Trading Plan Criteria Plan A Before trading any security, you must be able to answer the following questions. You must be honest with yourself and do not fudge the numbers or the responses. You will need to adjust this information as the market conditions change and your trading methods change. I would suggest updating the trading plan every quarter or if you trade certain times within the year, set up a regular date to update or modify your trade plan.

• How much capital am I setting aside to trade with? This is an important question since this answer will directly affect what securities you will trade and how many you can trade.
• How much am I willing to lose on one trade? Traders usually do not want to answer this question because it mentally admits that you will fail at one time or another. No one is 100% all the time. You will have a loss. This is an uncontrolled part of trading and we must accept this. The amount we lose is almost completely controlled by the individual trader. This single thought gives us so much financial power that we can literally say when enough is enough. Be fore even paper trading, you must be able to answer this question.
  • You can set up a risk by percent of account, percent of investment, or a dollar amount. I suggest using a percentage of investment on each trade. If you use a percentage, that percentage will never change when you start increasing the amount of capital in each trade. A very reasonable percent loss for forex and option traders is a risk of 10 – 20% of their investment (plus commissions). This gives the trade a little bit of room to move without getting stopped out. The choice will be up to you since some traders may not be able to risk 20% of the investment and other may want to risk more. It is a trial and error period and you will find a sweet spot that fits your style.
• What are my profit goals? Do not try to become a millionaire overnight. It will not happen. Instead, take small profits and make them consistent. The hardest part about trading is not getting into the trade; it’s taking the profit when it is available to you. Most trades are profitable at one point, but we are so focused on making big profits that we do not take the trades ‘off the table’ and we end up with losing trades instead.
  • Profit goals can be set by using percent of account, percent of investment, and dollar amount. Using the concept of a 1:1.5 risk/reward ratio, if we take the 20% risk we calculated earlier, then we would need a percentage gain of 30% to fall under these guidelines. We must get used to the fact that a lot of trades will never be 30% positive. Here’s how I look at it. Example:
    • You are entering a trade that costs $1000. Risk is 20% ($200) so your reward is 30% ($300). When this trade gets 10% ($100) profitable, reevaluate the trade. Look at the lights and see if there is a continued opportunity. See if the charts are losing angle or the volume is dropping off. If they are, take the profit off the table and go on to the next trade. If the charts are showing strength, then consider moving your stop loss to break even or use a trailing stop order to lock in a profit or prevent a negative trade.
• When do I exit my trades? Regardless of the profit goal, consider an exit on the trade when one of the following three items show themselves.
  • Maximum loss is hit.
  • Profit goal obtained.
  • Lights and charts are going against me.
• What do I want to accomplish with my trading account? This question will determine if you trade for leisure or you trade as a business. If you trade as a business and you are serious about being successful, you must have a long term goal. Is that goal making 20% of my account every month? Year? Do I wish to trade aggressively of conservatively? This will impact how many trades you need to make to obtain this goal.

o Example: You have a $10,000 account and you are only trading $2000 in each trade. If you make 10% on each trade, how many trades would it take to make 100% of your investment? $2000 x .1 (10%) = $200. $200 x 10 trades = $2000. So it took 10 positive trades to make 20% of your account. The time factor is a variable and some trades you may have to wait on longer than others.· Did I paper trade this strategy enough to be confident to use live money?

Plan B

Your Plan B relates to your stop losses and limit orders that help you strategize while you are currently in a trade. Trading is a different ball game when you’re a spectator as opposed to an actual trader and in the game. Emotions come into play and will alter your logical thinking. · Am I focused?

o Are the kids running around? Dogs barking? Etc.?

· What emotions am I dealing with right now? Anxiety? Nervousness? Scared? Personal?

o Emotions make us do things we never would do under a sane mind. Do everything you can to keep emotions under wraps.

· Did I remember to place my stop loss?

· Why did I enter this trade to begin with?

o Many times we enter trades and then look at the trade days later and forget why we did it to begin with. Journal your entries and write stuff down to help you remember.

· What were my long term/short term goals for this trade?

· Did I take a journal entry?

· Am I prepared to see red in my account?

· Did I start off with a small position or a large position? Meaning: Did I over leverage myself on this trade? o Remember; never put more than 10 – 20% of your account into 1 trade. You can always add to a small position to make it larger later. Emergency Plan

· Do I have my broker’s phone number available or on speed dial?

· Do I have a corded phone nearby in case of an electrical surge? Remember, cordless phones are run by electricity and will not work if the power goes out!

· Did I invest in a UPS (uninterruptible power supply) for my computer? This will keep your computer going long enough to close a trade or shut your machine off in the case of an electrical outage.

· Do I have my critical stop loss placed? Always have some type of stop loss active with live money just in case of an emergency.It seems like a lot of work. It’s not and it will save you a lot of money and headaches if you follow it as it was created.

REMEMBER…….Plan your Trades……And……Trade your Plan!

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