Trading Plan

Now, you have heard me say hundreds of times that there are many ways to skin this cat, as there are literally thousands of methodologies and strategies are employed every day by successful traders. There are strategies for all asset classes, for all time frames and for all kinds of markets….up…down or sideways. Now some of you may say, its technical analysis, but of course the fundamentalists would scoff at that notion. Some of you might say patience or discipline, and that would be true to a degree. No one is going to succeed without it, that’s true. But, you can display great patience and discipline and still not make money.

Now, a trading plan is not just reading some books and opening an account, and sometimes…the new trader succeeds at first without a plan… and thus don’t think they need one…

We do not need some idea of what kind of trader we want to be. It is likely best to start out by balancing our personality and desire to trade in a certain way …with our current circumstance. By this I mean…it is very hard to be an active day trader… if the person also has a full-time job. So we need to be realistic about what and when we will trade. From there…we can begin to develop strategies that cater to our lifestyle, personality and the particular market we have chosen to trade.

You have broken the trading plan down into 3 parts: Money Management, Entry rules and Exit Rules, so let’s address each of these specifically…and how our plan will not work without mastering them all.

First off, you call it Money Management, I call it risk management.

It seems obvious that we should be concerned about this, but so many traders overlook it. First, we have to determine what our maximum loss will be on each trade, but every trader has different risk tolerances and equity.

In fact our primary goal shouldn’t be to make money, our primary goal should be capital preservation. Our secondary goal should be to make money.

Many traders think of a dollar amount first when considering risk. And I think that can be dangerous. It is better to gauge risk as the percentage of the entire trading account which is being risked on each trade. The amount that is risked on any given trade should be 1-3% of the trading account. From my experience, traders that last it seems lean toward risking a very small percentage of total capital on each trade…therefore, we should risk only about 1 % of our capital on a trade.

Q, Can we have a trading plan without written rules?

We can’t articulate our plan if we have none.

The rules should to be written down. If they are not written down we have no idea what has made money and what hasn’t, because we can’t remember what exactly we did on each trade over the last month or year – and chances are, if someone doesn’t take the time to make a plan, they aren’t going to take the time to write down each trade in detail either…but if we have a plan we will know what is working and what isn’t…and we can fix it by altering the trading plan.

Lets talk about entries and exits, your other two keys

Most people concentrate on entries and don’t really consider exits right? But that is where our profits or losses lay. Anyone can get into a trade, but it is getting out that is really going to carry the day.

The first thing is we should always have a stop loss in place. This stop is what limits our risk to a very small percentage of our total account mentioned earlier, the 1-3% or less, or our set dollar risk per trade

We can also exit a trade with profit targets. Profit targets based on logical technical analysis allow the trader to see exactly what they can expect in return for the amount of risk they are taking on. If a reward likely won’t outweigh the risk…the trade should be avoided

Using stops and profit targets lets me know exactly what my risk to reward ratio is before the trade even takes place,

Having a trading plan will allow us to review our trades and correct our problems. But many students, especially those that have been trading a while, don’t really care to put in the time to review their mistakes and reinforce their rules.

The market moves so much that we are bound to be right some of the time, even with no plan. But without a plan, over the long run we will lose, and may end up making the same mistakes over and over again because we have no record of how we were trading in the past. Don’t let the market lure you in. If you are making trades by the seat of your pants, and it seems to be working, enjoy it, because it won’t last. Isolate what is working, and then solidify a trading plan by writing everything down. If things aren’t working, and you don’t have a plan, make one!

Overall, emotions should be pretty subdued when it comes to successful trading and following a plan. It is still fun, I love it, but if you are chasing emotional highs, trading is not the proper place for that. The market will give you plenty of highs…and even more lows if you are chasing a rush and gambling (no plan).

The market will let us know we are off our game. It our responsibility to asses the situation and get back to our winning ways. No one is going to do it for us, and the market rarely allows us to just coast along for long. To trade successfully takes regular work and sticking to our trading plan. And when our trading isn’t working (and we are sticking to it) it is our job to fix it.