DEVELOPING YOUR TRADING PLAN OUTLINE- For readers of Stocks and Commodities Magazine.

 

1.  Define your objective. 

    1. Do you plan to trade for a living or just augment your income?
    2. Which instruments to focus on.  Listed equities.
    3. Time frame; Scalp, Swing Trade, Manage portfolio, combination?
    4. Initial investment.

2.   Education and Training.  You should plan the amount of time you plan to spend on continuing and ongoing education.  Plan the amount of time you will spend doing your homework and research.  This business requires continual education and adaptation.

The trading plan is perhaps the most overlooked tool in a trader’s arsenal. In fact, most traders don’t even have one. Then most traders also go broke in their first six months. In our opinion, this is no coincidence. A pilot doesn’t leave the ground without a checklist, a builder doesn't begin construction without a blueprint, and a successful trader doesn’t take a trade unless they have a carefully crafted trading plan.

Much like a business plan, a trading plan is used to define your goals, identify your costs, and lay out the strategies you need to reach those goals. Unlike a business plan, it must be adhered to with absolute discipline in order to be of any use at all. It is this intractability that gives the savvy trader an edge. A measure of consistency in the way they approach an ever-uncertain market. Why is consistency important? Think about how difficult it is for a stationary marksman to hit a moving target (much harder than it looks in the movies). Now imagine that the marksman is also moving at the same time. This dramatically reduces the chance of hitting the target with any degree of regularity. On a high level, this analogy illustrates the relationship between a trader and a stock. The stock is always in a state of flux (moving either up, down, or sideways), and the trader is continually trying to gauge that movement so he knows exactly when to pull the trigger. If he does this from a stationary prospective, he will of course have greater success than if he constantly shifts his position. The first step in writing your trading plan lies in understanding exactly what you are writing about: the business of trading. And make no mistake, it is a business - big business - with some of the shrewdest and most experienced players on Wall Street competing against you.

3. You can “know” what others know, and you can learn to trade as well as others.  Often times success boils down to the “trading plan” not the “player.” Decisions to buy or sell a stock often come down to the last second. Without a plan, there’s bound to be some hesitancy in which the window of opportunity is lost. On the other hand, the prepared trader – the one with a trading plan - can react without hesitation in a consistent fashion because they’ve already written down the various trading strategies they intend to play and have a clearly defined set of rules on how to play them. This takes the emotion out of the equation and allows the trader to behave mechanically.

4. If it is agreed that trading is a business, the language and the format of the plan should be in keeping with a business like tone. Furthermore, it must be written well enough to convince a hypothetical banker that trading is a worthwhile enterprise and that you are up to the task of running it as CEO. So if you were thinking about dashing off a few quick paragraphs, think again. Writing a good trading plan takes time, careful thought, and commitment to the idea that it will work. Otherwise you are just going through the motions of what in the end will amount to a futile exercise.

5.  BE REALISTIC! Don’t set goals based on wild dreams of making a lot of money real fast.  Do not set yourself up this way.

6.  DETAILS.  Cover as many facets of your trading plan as possible. Strategies, indicators, money management, entries and exits, when to trade, and finally, when to simply observe. The more detailed your plan, the better..

7.  STRATEGIES: (Samples): Opening Only Orders, Scalping, Post Opening (sectors, etc.), Relative Strength, Momentum, M & A Spreads. Pairs, Contrarian-Volatility, Break-outs, and constant enveloping.

8.  INDICATORS TO USE: Define the use of your indicators.

9.  MONEY MANAGEMENT: Be sure to keep the proper perspective about your money.  It’s easy to get “caught up in the moment.” This works both ways, when you’re having a great day, or a losing day.  Just be sure to have enough to play the next day.

10. SHARE SIZE (contract size): This is the “valve” to use to help with your money management.  Define this carefully.  Do not exceed your predetermined limit without modifying your business plan.

 

 Remember that this plan is a living document, and should be reviewed and modified often.