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"if you fail to plan, you plan to fail." This couldn't be truer in the world of trading. None of us begin to trade with the intention of failing but that is just what we are doing if we aimlessly look for trades to put our money into without a proper plan of attack. If you spend some time developing a trading plan for the next trading day, the day after and for your trading career, you’ll find that your trading goes much more smoothly and more profitably. It may sound glib, but those who are serious about being successful, especially traders, should follow these eight words as if they were written in stone. Ask any trader who makes money on a consistent basis and they will tell you, "You have two choices: you can either methodically follow a written detailed plan, or fail." Let’s face it; the road to riches is littered with lost traders who lack a road map to success. Have you ever asked yourself what kind of a trader are you? Do you find trades by tossing a coin, going with the crowd or maybe going against the crowd? Do you start the day by checking your horoscope to see if you should trade today or not? Do you go with the trend or possibly play the countertrend? Or do you follow a written trading plan? My hope is that you have a written trading plan or at the very least you are working towards that goal. Howard Seidler in “The New Market Wizards” by Jack Schwager states: "In regards to being successful in the markets, I think the single most important element is having a plan." If you have a written trading plan detailing your actions, congratulations, you are in the minority. While it is still no absolute guarantee of success, you have eliminated one major roadblock. If your plan uses flawed techniques or lacks preparation, your success won't come immediately, but at least you are in a position to chart and modify your course. By documenting the process, you’ll learn what works and how to avoid repeating costly mistakes. Yes, that’s right our plans will need to be constantly evaluated until we find what works for us. Before you even consider trading it is important to take the time to seriously question your reasons for trading. Do you see trading as the means to a quick profit? Are you trading for the excitement or for a rush? Do you want to trade because you seek satisfaction on a purely intellectual level? Do you see trading as a hobby or as an additional avenue of investment? Are you looking for a way to fund early retirement or do you see trading as an opportunity to enhance your savings? Do you need the profits that trading might bring to cover debts or other financial commitments? Many traders do not know why they want to be in the market. By taking the time to honestly evaluate your motive for trading, not only will you learn more about yourself but you'll also be forced to give good reason as to why you are going to risk your hard earned capital to the market. When someone decides to start a business, the first thing they do is usually draft a business plan. Most people would see this as mere common sense; however it seems the same logic does not apply to many new traders. Rather than planning how and where their capital is to be allocated, many new traders will launch headlong into a trading career with little regard as to their risk and profit objectives. By failing to have a trading plan, a trader will not know what to do when the market goes in their favor or worse still, when it moves against them. Without the structure that a trading plan provides, you will find yourself at the mercy of an ever changing market and your own conflicting emotions; this can be a recipe for disaster. Trading is a business, so you have to treat it as if someone was looking over your shoulder to see if you really know what you are doing. That means we have to be accountable for our actions. In order to be accountable we have to have something to measure our progress against. Think of it, if you were trading someone else’s money don’t you think that they would want to know that you had a plan that you followed which would guide you in successfully handling their money. You bet they would! It shouldn’t be any different for us. Just because we may be sitting at home trading in our underwear doesn’t mean we can’t be professional in our approach to making money in the markets. Reading some books, buying a charting program, opening a brokerage account and starting to trade is not a business plan – it is a recipe for disaster. If you don't follow a written trading plan, you court disaster every time you enter the market. Like the markets, a good trading plan evolves and changes, and should improve over time. Whether or not you have a plan now, here are some ideas to help with the process. A plan should be written out and followed while you are trading, but subject to re-evaluation once the market has closed. It changes with market conditions and adjusts as the trader's skill level improves. We are all different so using someone else's plan does not guarantee your
trading success. Each trader should write his or her own plan, taking into account personal trading styles and goals. My trading plan started out as a list of trading “rules” at the start of my career and I continued to jot down more notes as I learned what worked for me and what didn’t. Eventually, my notes evolved into my own full trading plan. A proper trading plan should not only contain a list of “do’s” and “don’ts”, but it should determine where to enter and exit, and where a trader will stop trading for the day. Every setup traded should be detailed, preferably with stock examples. In this way, when a trader takes a loss they can look back at the trading plan and easily see if the loss was due to not trading correctly or was simply due to a good trade that went against them. A detailed trading plan helps to remove the emotion when entering into or out of a trade. I like to review my plan at least once a week, and if I change it then I read it every day before I trade, until it is committed to memory. There is no way to guarantee that a trade will make money. The trader's chances are based on his or her skill level and trading system. There is no such thing as winning all the time, but a trading plan takes this into consideration by provide a way out when thing don’t work out as planned. Experienced traders know before they enter a trade that the odds are in their favor or they wouldn't be there. You not going to win every battle but by following a plan you will win the war. Traders who win consistently treat trading as a business. While it's not a guarantee that you will make money, having a plan is crucial if you want to become consistently successful and survive in the trading game. A written trading plan helps keep you from making thoughtless, spontaneous, and emotional trades. An unwritten plan often gets changed when the trader’s mood changes. A written plan keeps you from many trading pitfalls such as greed, fear, boredom, a need to be right, a need to be a victim, and masochism. The trading plan therefore imposes the disciplined structure that is essential for long term success. This is only the first of a five part series on our discussion of the “Trading Plan.” Next week we’ll take a look at more of what a trading plan consists of and some of the steps involved in creating a trading plan. Note: Last week I wrote, “In the past we have received many requests about trading plans and how to prepare one. So, over the next few weeks we’ll take a look at why we need a trading plan and how to go about creating one. Because we all have different skill levels and trading platforms what works for me many not work for you and visa versa. So, for those of you that already have a trading plan that you would like to share, go ahead and send it along to me and I’ll take a look at it. Then maybe I can share some of your ideas along with some of my ideas to the rest of our readers.” Trading Plan (Part 2) Last week we talked about, "If you fail to plan, you plan to fail." The bottom line is that profitable traders have a trading plan that they execute with confidence. You should too! Unfortunately, many traders are not successful! It’s not because they weren’t smart enough, it’s just that they lacked direction. Aimlessly jumping into and out of trades for no reason other than to just make a buck has ended many would be trading careers. One of the main reasons is that many people don't have a trading plan. When you don’t have a plan, your trading decisions are largely based on hunches, instincts and emotions. Chances are you will not achieve long term success. Trading has relatively straight forward concepts, yet is amazing how many people make a mess of it. I remember back when I used to fly for a living. I worked hard at learning the mechanics of flying; I drilled what I would do during the takeoff, climb, enroute, descent and landing phases of each flight. In addition I had to memorize any and all emergency procedures that could possibly happen during any segment of the flight. It was a lot of hard work, but once I had everything well thought out or planned, I found flying to be easy and enjoyable. It’s the same with our trading. In all reality, trading is easy once you have a well thought out plan in place. The real work is developing a trading plan that works for you. A trading plan does not have to be difficult, time consuming, complicated or stressful in order to be profitable. Having a written trading plan provides you an edge in an arena where most people fail, how can you afford to not give yourself an edge? In today’s lesson we’re going to take a look at some of the elements that are essential for every trading plan. Trading skills - Are you ready to trade? Have you tested your trading skills by paper trading and do you have confidence in your skills? Can you follow your trading signals without hesitation? Having a trading plan to follow will increase your confidence. A trading system can be as simple as a few rules or it can involve a lot of complicated technical analysis. The key is that the system complements your personal trading style. You can either create a system from scratch or buy an off the rack trading package. Either way it is advisable to test the system by paper trading until you feel confident that it works for you. If your trading account deteriorates by 50% at any stage, trading should be halted immediately and indefinitely until you reassess your trading plan and skills. Usually, the number one reason for large declines in trading accounts is because traders don’t keep individual losses small. We’ll discus this more in some of the other elements below.
Physical and emotional preparation – How do you feel? Did you get a good night's rest? Do you feel up to trading today? If you are not emotionally and psychologically ready to take on the markets, it is better to take the day off – there is no rule stating that you have to trade everyday. Overtrading just to trade is one sure way to lose the shirt off your back. Many trades have a routine they follow before they trade that gets them in the mindset to do battle with the markets. Create one that puts you in the trading zone. Your trading area should not offer distractions. Remember, this is a business, and distractions can be costly. Trading takes discipline. Maintain the necessary discipline to follow your plan through both good and bad times. Remember that the key to any plan is how well it holds over time. Avoid getting into a trade because you are anxious from waiting for the trade to setup. If you miss an opportunity, remember, there is ALWAYS another trade just around the corner. Don’t get impatient and jump into a “close enough” trade setup – don’t depart from your trading plan. Lastly, always take a break after two losing trades, or at any time when not feeling that you’re 100% in the game. Define your risk level – How much of your account should you risk on any single trade? It can range anywhere from around 1% to 5%. This means if you lose that amount at any point in the day, you get out and stay out. Don’t trade markets that you don’t understand and trade only with risk capital, not your grocery money. Do not use credit cards, or personal loans to trade off of. The principles of money management and risk control are perhaps the most important issue that any trader will face. Money management is mandatory. Money management is essential to not only succeeding in the market but also staying in the market. Like all aspects of trading there are no hard and fast money management rules. Money management can simply be defined as “how much capital you are willing to risk?” The most important thing to remember is to keep your losses small and to not take losses personally. Successful traders work according to probabilities, aiming to win on average more than they lose. Simply put, unless traders know how to manage their money correctly and keep their losses to a minimum, their trading career is certain to be short lived. Manage your trading account – Intelligent money management begins with the trader starting with enough capital to withstand several losing trades. A predetermined risk/reward ratio goes a long way in preserving your account. What is the minimum risk/reward you will accept? Some traders will not take a trade unless the potential profit is at least two or three times greater than the risk. For example, if your stop-loss is a dollar loss per share, your goal should be a $2 or $3 profit. The goal is not only to make money, but also to be able to continue to make money consistently for an extended period of time. You might want to consider setting weekly, monthly and annual profit goals in dollars or as a percentage of your account. A trader should establish a "surplus account" after a series of successful trades. The goal is to retain the "surplus account" for times of emergency and/or charitable giving. I personally take money out of my account and stash it somewhere else so that I am not tempted to “play with the market’s money” and take unnecessary risks in my trading. In addition, I also like to take a percentage out of my monthly gains and give it to a charitable organization. I feel it gives me yet another reason to trade. Research your trades – Diversification is the key to any trading plan. Looking at a number of markets will allow for increased versatility in varying market conditions. It’s well documented that dividing capital among unrelated markets can reduce risk. Or you may want to only concentrate and focus on a few select markets and completely master them – this is the bias of many professional traders. Trade the most active stocks and refrain from trading the slow moving markets. Keep your charts simple. No matter how tempting it is to add new indicators, experience shows they always end up getting removed, so save the hassle and keep them out. However, whichever trading system or program you use, be sure to label major and minor support and resistance levels. Do not make a trading decision to buy just because the price of the stock is low or sell just because the price is high. Before the market opens, find out what is going on with other markets around the world? Are index futures up or down? Index futures are a good way of gauging market mood before the market opens. What economic or earnings data is due out and when? You may find it better to wait until a report is released than take unnecessary risk; this is especially true for upcoming Fed announcements. Establish entry rules –A typical entry rule could be worded like this: "If signal A triggers and there is a minimum target at least three times as great as my stop-loss and we are at support, then buy X contracts or shares." Or “The entry trigger is to go long upon the breach of the open on a five-minute chart providing the open is the high of the day.” Your system should be complicated enough to be effective, but simple enough to facilitate snap decisions. If you have 10 conditions that must be met and many are subjective, you will find it difficult if not impossible to actually make trades. Computers often make better traders than people, computers don't have to think or feel good to make a trade. Today, nearly 50% of all trades that occur on the New York Stock Exchange are computer-program generated. Establish exit rules – Most traders make the mistake of concentrating 90% or more of their efforts looking for buy signals and pay very little attention to when and where to exit. Before you enter a trade, you should know where your exits are. You should have a minimum of two for every trade. First, what is your stop-loss if the trade goes against you? It must be written down. Mental stops are seldom implemented, so don’t use one. Second, each trade should have a target price. When you start a trade, consider using an OCO (One Cancels the Other) order to place a protective stop-loss and a target price at the same time. Placing an order like this before the market opens keeps you from making emotional decisions during a fast moving market. Some traders fall into the trap of getting “married” to a position and find it hard to exit the trade when it goes against them. These traders cannot sell if they are down because they don't want to take a loss. Get
over it or you will not make it as a trader. If your stop gets hit, it means you were wrong. Never increase your trading after a loss and never move a stop back. Manage your trades. Do not move your stop-loss unless you have a profit and then move it only as a trailing stop. Protect yourself against the possibility of turning a profit into a loss. Lastly, never change your position in the market without a good reason that is based on a fundamental or technical rule indicating a change in trend. Record your trades – All good traders are also good record keepers. If they win a trade, they want to know exactly why they made a profit. More importantly, they want to know the same when they lose, so they don't repeat unnecessary mistakes. Have an easy to follow form that you use for each trade, it keeps things in order and it organizes your thoughts. Write down details such as targets, the entry and exit of each trade, the date and time, support and resistance levels, daily opening range, market open and close for the day and record comments about why you made the trade and lessons learned. Also, you should save your trading records so that you can go back and analyze the profit/loss for a particular system and other important factors. Remember, this is a business and you are the accountant. Review your trades – After each trading day, review your actions. Did you execute your trades according to your plan? Write down your conclusions in your trading journal so that you can reference them again later. This will help you find the strengths and weaknesses in your trading system and then you can go back and teak your trading plan. Learn from your trading mistakes; never make a trading mistake without asking yourself why. Trading Plan (Part 3) Trading is a business. As in any other business, a well thought-out plan can make the difference between success and failure. A trading plan is a pact you make with yourself. It is your personal blueprint for success. It must include not only your goals but must also detail how you plan to achieve them. Traders work alone, and so do not need to deal with many of the organizational issues confronting other business plans. But traders need a business plan (trading plan) just as much as any other business. In our last lesson we covered some of the basic elements that I believe are essential for every trading plan. In today’s lesson we’re going to explore a bit further three important factors that need to be strongly engrained into our minds and ultimately into our trading plans: Trading Psychology, Discipline, and a Trading System. Trading Psychology Your mind is your main trading asset and must be guarded. How do you plan to protect yourself throughout your trading career? How will you guard against burnout? When and for how long will you take a vacation or a break from trading? (Remember, it’s ok and it’s healthy to take a break from trading). What is your plan in the event of an unusually large loss? Are there things outside your trading which heavily influence you emotionally? How do you plan to deal with them? Emotional decisions are the most destructive factor to the bottom line. Your trading plan is your protection to guard against these! Perhaps the single most important aspect of trading and yet the one that is paid little attention to by the average trader is the psychology of trading. Traders must remain emotionally detached from the market; this is easy to say but often difficult to do. A new trader will experience a gauntlet of emotions as they enter the markets for the first time – fear, anxiety, panic, joy, even greed – these are all emotions that the greenhorn trader should not only expect but be prepared to face. You need to remain emotionally detached and act according to your trading plan. Emotional imbalance impairs your ability to make intelligent decisions. Of course, there are other things to consider besides your emotions. Do you know why you are trading? Are you trading for the thrill, for the challenge, or to make a steady income? Whatever the reason, you will enjoy the experience more and trade better if you know your purpose. Many new traders approach the market with unrealistic expectations. Instead of seeing trading as a business which requires both time and some hard work, they see the market as nothing more than a place to make “quick and easy money.” At first they may do well but without any kind of plan in place invariably their inexperience and overconfidence catches up with them. You must accept the fact that the market is always right and that at times you’re going to be wrong. There is no shame in being wrong, even the best traders can be in error. If you don’t admit your wrong and do something about it, fear, greed and hope can cloud your vision of the market and can cause emotional responses harmful to your trading. Do not become in love with a losing position. If you’re wrong – admit it, get out, salvage your trading capital and wait for the next trading opportunity. Conversely, congratulate yourself and feel good about a trade when you have labored according to your trading plan, regardless of the profit or loss. Acknowledge that you are the person responsible for your winning and losing – don’t blame the market, don’t blame a hot tip that didn’t pan out, and don’t blame a newsletter or financial advisor. Losses give us the chance to focus on where our
plan fell short and to instantly correct it. Discipline Like most things in life, you won't succeed without discipline. Discipline is adhering to your established trading plan, including entry points and stops. To become consistently profitable, we must have a high level of self-discipline with a welldefined trading strategy that effectively maximizes profitable trades and minimizes losing trades. Creating a trading plan is relatively easy but it is the discipline to follow that plan that will differentiate capable traders from all others. During periods of profit, adhering to a trading plan is comparatively easy. However, during periods of loss the same trading plan will appear rigid and constricting and it is at such times that a trader will be tempted to stray from the plan. At times you might want to deviate from your trading plan, but doing so invalidates the reason for preparing it in the first place. Remember the purpose of the plan was to provide guidelines to follow. Breaking from it will often lead to risk exposure that you were originally unprepared to take. Besides abandoning your trading plan, a lack of discipline can lead to other troubles for the trader. If you abandon your trading plan you may be tempted to impatiently rush into or out of trades without considering the consequences. You might also start to ignore price charts or start falling victim to your emotions. And most assuredly you will not utilize your stop-losses. Once you ignore your stop-losses it is only a matter of time before you make your last trade. How can you make money, if you don’t have any money to trade with? The most important trading rule is to cut your losses. Even though your primary motivation is to make money and you consider this important, protecting your trading capital is even more important. One of the best ways to manage your risk when trading is to limit how much money you put into a single position. This is to guard against the possibility of something unpleasant occurring. What is the maximum percentage of your trading capital you are prepared to commit to a single trade? If you have had three losses in a row, the likelihood that you are going to have a profitable trade doesn’t automatically swing in your favor. Don’t increase your trade size thinking your next winner is just around the corner. Instead, after a few losses, your trade size should be decreased slightly to reflect your reduce trading capital. You also have to ask yourself, “What happens if you keep losing money?” Are you prepared to lose all of your trading capital before you are forced to stop, or do you think you would like to hold on to some of the money and place it somewhere else, with the plan of either not trading again for an extended period of time or giving up altogether? There is a lot to learn about managing your money in trading. Telling you to cut losses is one thing but executing it ruthlessly and without delay can be another. Trading System Having a routine makes it so much easier to follow your plan. Why is this critical? Well, why do most traders fail? Simple, they don’t have a plan. A trading plan will often follow a trading routine that the trader consistently exercises over and over again. The routine should bring together most of the parts of your trading plan into a methodical and deliberate process for each and every trade. When you don’t have a written trading plan, even though you have developed a plan in your head, it is too easy to drift away and go back to old habits. Having the written plan will guide you to making the right decisions. Consider the difference between knowing what has to be done and what you want to do. In trading, what has to be done is always the right choice, yet if you don’t have a trading plan, you can easily decide with what you want to do, instead. In your routine you’ll likely be sorting through large amounts of information in the form of websites. A routine will help you manage the information flow, it is important to identify what information you need and where you will find it. What information do you really need to trade and what information is for interest only but doesn’t effect on your decisions? Decide how you will categorize the industry/economic sectors in the market. Will you use any form of sector analysis in your method? If so, how will you use it? Will it be the starting point for your trade selection process or will it be a final filter to ensure you don’t enter stocks that belong to poorly performing sectors? If you are going to use fundamental analysis, what items are of most interest to you? For example, are you interested in earnings, dividends, growth, acquisitions? If so, how will you use that information? Write down your trading methodology. Start by talking in very general terms about how you are going to approach your trades. As examples, are you going to trade only heavily traded stocks that are trading at new 52-week highs? Or are you going to trade more speculative stocks and trade breakouts and/or chart patterns? Are you going to use technical analysis? If so, will you be looking at trends? Over what time frame and how are you going to identify them? Are you interested in reversals of short-term or medium-term trends? If so, how will you identify them and then what will you do once you identify them? How about technical indicators? Will you use any of them? What are your conditions that you look
for in all of your trades? What setups will you use and do you have printed examples in your trading plan to go back and review. Finally, what triggers will you use? Usually following specific trading rules and keeping it simple works best! What software are you going to use? When you place your order, what type of order will you use? How will you place your order? Will you use the same type of order under all circumstances? It is essential that you monitor your performance for a variety of reasons. The most basic of these is to ensure you protect your trading capital. Further, monitoring your performance allows you to review your past trades and learn from your mistakes. This is an approach used by some of the best traders in the world. They will periodically review all of the trades they have conducted, both winners and losers, and learn from them. How will you go about conducting a review of your trading activities and how often will you do this? A trading diary should detail all of your trading decisions, including reasons for starting a trade, your emotions when opening the trade, trend direction, as well as daily adjustments of exits. A trading diary provides you with a methodical way of maintaining a clear focus. It can also assist you with learning from your mistakes. A written trading plan is the only way to go. It is critical that you create your plan when you are thinking clearly and then trade your plan. By planning each trade from beginning to end you are forced to follow a disciplined and methodical approach to the markets. Trading Plan (Part 4) In our second lesson we took a look at some of the elements that are essential for every trading plan. Two of the more important elements stated the need to record your trades and then review your trades. Here is a review below. Record your trades – All good traders are also good record keepers. If they win a trade, they want to know exactly why they made a profit. More importantly, they want to know the same when they lose, so they don't repeat unnecessary mistakes. Have an easy to follow form that you use for each trade, it keeps things in order and it organizes your thoughts. Write down details such as targets, the entry and exit of each trade, the date, support and resistance levels, record comments about why you made the trade and lessons learned. Also, you should save your trading records so that you can go back and analyze the profit/loss for a particular system and other important factors. Remember, this is a business and you are the accountant. Review your trades – After each trading day, review your actions. Did you execute your trades according to your plan? Write down your conclusions in your trading journal so that you can reference them again later. This will help you find the strengths and weaknesses in your trading system and then you can go back and teak your trading plan. Learn from your trading mistakes; never make a trading mistake without asking yourself why. In today’s lesson you’ll find two different documents in which you can track your trades. It is extremely important that we write down why we got into the trade and the results. Learning from your own successes and failures is the best way to improve as a trader. If you fail to do this step you will likely continue to aimlessly wonder from trade to trade, a sure way to lose your trading capital. Below is a simple yet effective way for you to plan out your trades. Having an easy to follow form that you use for each trade, keeps things in order and it helps organizes your thoughts. I’ll break down the form below with some comments and then later at the end of this lesson I’ll provide you with two Microsoft Word documents. One of our readers, Monica, has provided us with her “Investment Tracking Record” that she uses. It can be used by our INVESTools and Success Magazine readers. If you have access to these sites you may want to take a look at her trading form. It should be fairly straight forward, so please don’t ask me how to use the form. For all of our other readers you can use the form below, it is the one that I use. To keep things consistence I have followed much of the same format as found in Monica’s document and I just wanted to again thank her for her contribution. Trading Plan For:……………………. (Insert Stock Symbol) Market Trend Index DOW NASDAQ Up Sideways Down
S&P 500 We start by noting the trend of the Dow, NASDAQ and the S&P 500; this will give you the general direction and strength of the markets. We’ve all heard the saying, “Don’t fight the trend.” So if the Dow is trending higher then you should be looking to buy Dow Stocks. Once you know the trend of the market then you may want to use some sort of scanning software to find bullish stocks. Fundamentals Incometrader.com Stock Evaluator Industry Group Next Qtr Earnings Date Good Average Industry Trend News Bad Up / Sideways / Down Pass/Fail
Next we login to the Incometrader.com website and look for the “Stock Quote & Stock Evaluator” box and then type in the ticker symbol of the stock we are interested in. Generally, we’ll look for “Good” to “Average” stocks for long trades and “Bad” to “Average” stocks for short trades. If the stock’s fundamentals and news are favorable we can take a look at how the stock trades in relation to its industry. If you don’t already have access to this information just click on this link and it will take you to a free website to compare a stock to its industry. http://www.marketwatch.com/tools/industry/?dist=10rt If you take a look to the left side of the webpage you’ll see “Compare a stock’s performance to its industry:” In the box, type in the ticker symbol to see a both the stock and its industry overlaid on the same price chart. This step could probable be listed below in the “Technicals” section of this form but I like to place it here as I am already looking at the stock’s industry during the fundamental analysis. Technicals Weekly Trend 30-Day Moving Average Support MACD Daily Volume $ Buy / Sell / Flat Up / Sideways / Down Daily Trend Up / Sideways / Down Chart Pattern Resistance Stochastics Average Daily Volume $ Buy / Sell / Flat Up / Sideways / Down
We then move on to my favorite part, the technicals. It’s been my experience that when you have both a weekly chart and a daily chart moving in the same direction that you will often see the biggest move in a stock’s price. Also, if the weekly chart is down and the daily chart is up then you will often see a choppy market, which can be difficult to trade. Not everyone uses the same technical indicators, so if you use something other than MACD and Stochastics indicators you could just replace them here with your indicator of choice. Entry Profile Current Price $ OR Current Price $ Trade Direction SHORT $ Trigger Price $ Limit Price $ Target Price $ Stop-Loss Price Trade Direction LONG $ Trigger Price $ Limit Price $ Target Price $ Stop-Loss Price
Once we have decided on the stock that we want to trade we fill in the boxes here just like we do on the Incometrader.com “Stock Pick” section of the website. Entry/Exit Record Open Date Buy or Sell QTY Entry Exit Profit Close Date
$ Stop-Loss $ $ $
$ $ $
This section is devoted to recording our entry and exit prices. The box labeled “Stop-loss” is first used for the initial stoploss and then as prices move in the desired direction you can fill in the other boxes with a trailing stop price. How would I rate this trade? (1=Good 2=Bad) 1 2
Comments, such as why you initiated the trade: (Record on back of sheet) The last part of this form is where you turn the sheet over and write down your thoughts about the trade. You might even want to print out what the price chart looked like when you entered and/or exited the trade. This section provides a great learning tool into why we did or didn’t do well on a trade. If you would like to download the Microsoft Word document for the form above please click here. (see below) If you would like to download the Microsoft Word document that can be used by our INVESTools and Success Magazine readers as provided by Monica please click here. (see below) Keeping track of your trades allows a trader to examine very closely, not only losing, but also winning trades. If you don’t follow your plan exactly, when something goes wrong, you will not be able to analyze it and explore the problem. By sticking to your plan and recording what was happening when you entered and exited a trade, you stay focused, regardless of what happened. It gives you a frame of reference and a plan to succeed the next time you encounter the same set-up. When you encounter the trade again with a successful result; it provides you with something that money can’t buy: psychological capital and it builds the confidence that traders need to survive. A good trading plan is always complimented by a diary of your trading successes and mistakes. What you learn from your mistakes is more important. You paid for them; you may as well learn something from them, if you don’t remember them you are bound to repeat them.
Trading Plan For:…………………….
(Insert Stock Symbol)
DOW NASDAQ S&P 500
Incometrader.com Stock Evaluator Industry Group Next Qtr Earnings Date
Industry Trend News
Up / Sideways / Down Pass/Fail
Weekly Trend 30-Day Moving Average Support MACD Daily Volume $ Buy / Sell / Flat Up / Sideways / Down Up / Sideways / Down Daily Trend Chart Pattern Resistance Stochastics Average Daily Volume $ Buy / Sell / Flat Up / Sideways / Down
Current Pric e $ Trade Direction LONG Trigger Price $ Limit Price $ Target Price $ $ Stop-Loss Price
Current Pric e $ Trade Direction SHORT Trigger Price $ Limit Price $ Target Price $ $ Stop-Loss Price
Open Date Stop-Loss $ Buy or Sell $ QTY $ $ Entry $ $ 1 2 Exit $ $ $ Profit Close Date
How would I rate this trade? (1=Good 2=Bad)
Comments, such as why you initiated the trade: (Record on back of sheet)
Investment Tracking Record Index
NASDAQ 100 DOW S&P 500 Low VXN (NASDAQ 100) High (Bearish) (Bullish) Low
Market Forecast Trading Zone (<20 or >80) Market Posture (30 Day MA) VIX.X (S&P 500)
High (Bearish) (Bullish)
Stock Symbol/Name Phase 1 Score (5/1) Industry Group Big Chart Rank Green Red Yellow F/E Score (>3) Price Pattern (>3) Next Qtr Earnings Date News (Pass/Fail)
30-Day Moving Average MACD (1 Yr) Avg Daily Volume (>$1M) Up / Sideways / Down Green / Red Y/N Stochastics (1 Yr) Industry Group Trend Green / Red Up / Sideways / Down
Entry Date Support (61.8%) Resistance (100%) Trading Pattern (>4) Stock Price (>$20) Target Price (123.6%) Expiration Date (45-90 Days) Strike Price $ $ $ $ $ Option Symbol Spread (Bid – Ask = <$0.30) Ask Price Stop Loss (50% of Ask Price) Open Interest (>1000) Delta (>$0.50) Implied Volatility (<40%) Over/Under Value (Mid Col <20) $ % % $ $ $
Position Size (2% or 4% on ETFs) $_______ Risk Capital x 2% = $______ Portfolio Risk / 100 = ______ Contracts Reward/Risk Ratio (2:1) ROI % Profit Potential $
Exit Profile (3% Break in Support/Resistance)
Exit Date Stock Exit Price $ 30-Day Moving Average Profit/Loss Up / Sideways / Down $
How would I rate this trade? (1=Poor 2=Good 3=Great)
Good trade = Followed all my rules!
Trading Plan (Part 5) A lot has been written about having a trading plan, yet it seems that very little has been presented in the form of a concrete trading plan. Why? Because anybody who has a successful trading system would be busy trading it, and likely not sharing it. That brings us to the purpose of this whole series, to leave you with a workable trading plan from start to finish. When I originally started this series I had planned it out to be five lessons in all. However, after working through the last lesson I realized I would be leaving you ill equipped if I tried to sum up everything in one final article. This of course would defeat the whole purpose of this series. I feel that in order for us to cover this last item, a trading plan template, that it will take a few more lessons to do the job right. So, I have decided to tackle only a few concepts at a time, starting at the beginning, and work through them step by step. Your job, or homework, will be to take the examples and then use and fit them to your own trading skills and style during the week. We’ll continue this process until we have completed a workable trading plan. Taking one step at a time is much easier then trying to undertake the whole project all at once. In fact, I am sure that if we tried to create a plan in one sitting (which is not possible) that many would just give up on the whole idea and continue to aimlessly drift from trade to trade as they have been doing and then ultimately finally giving up on the whole trading for a living idea. The intent of the next few lessons will be to guide the trader through a logical planning process to create a trading plan that can be refined over time. Again, each trader’s approach and style will vary according to their disposition. Therefore, when we are done we will have many different types of trading plans customized to meet the needs of the individual trader. This document is merely a template with guidelines to which you may add, delete, and/or revise any item that will assist you in successful trading. We’ll first start by writing out trading objectives. Are you trading for wealth creation, an extra source of steady income or just for fun? Your objectives should be as specific as possible stating exactly what it is that you want to achieve. Many would call this a Mission Statement. For example, you’ll want to ask yourself, why do you want to be a trader? “To make money!” This is a generic answer that is applicable to all traders, it is not personal to you and, therefore, it is not beneficial to your trading plan. If you want to draft a mission statement, this is a good place to put it in your trading plan, followed by trading goals and objectives. From this point forward each section that we cover will have questions highlighted in blue for you to answer and a brief paragraph explaining what the question is trying to get at. Below that, you’ll find an example in italic lettering; this is where you will answer the question for yourself. TRADING GOALS AND OBJECTIVES Goals are final outcomes of where you want your trading to be, while Objectives are milestones along the way to achieving your goals. That is, a Goal might be to have consistent and successful trading profits on a monthly basis. An Objective might be weekly profit targets and some identifiable measures of trade success, such as 3 out of 5 profitable trading days per week, or making 2 or 3 trades a week and following your rules. It really depends on your trading style. Once you have clearly defined goals and objectives you’ll have a logical map to assist you with determining your trading strategies. Ok, let’s get started! What are Your Annual Trading Goals? This is the big picture. Think in terms of the how you want to improve as a trader between now and this time next year. My yearly trading goal is to . . . (something along the lines of becoming a better trader winning more than losing and knowing the reasons for my success). This will consist of three parts: 1. I receive coaching from _____________, who is one of the best trading resources of the strategies that I employ. 2. I am well prepared and know why I am trading because I have a written, clearly laid out trading plan. 3. My strategies are well developed, tested and monitored extensively to ensure that they remain tradable, practical and profitable. I expect to achieve these goals because . . . (in addition to the coaching, I also do the following. . .). When I achieve my goal, my reward will be . . . (a family vacation in Hawaii). What are Your Monthly Trading Goals? Now define your monthly trading goals. How will you achieve these goals and how will you reward yourself when you do? My monthly trading goal is to . . . (achieve consistent profitability every month due to proper money management). I expect to achieve these goals because . . . (I review my performance on a daily / weekly / monthly basis and quickly spot
any problems, should they develop). When I achieve this goal, my reward will be . . . (to give away 10% of my profits to my church or favorite charity). What are Your Weekly Trading Goals? Time to get out the magnifying glass and zoom in on the details. Now to define your weekly trading goals. How will you achieve them and how will you reward yourself when you do? My weekly trading goal is to . . . (trade every day of the week in accordance with my trading plan. This will entail taking my stops instantly; sticking to my risk and money management strategies; following my exit criteria and devoting the appropriate amount of time to searching for new trades and only selecting them if they meet my long or short setups as outlined in my trading plan). When I achieve this goal, my reward will be . . . (a special dinner out with my family). What are Your Daily Trading Goals? Finally, it’s time to pullout the microscope. On a day-to-day basis, what are you trying to achieve? How will you measure your progress and how will your hard work be rewarded? My daily trading goal is to . . . (trade according to my plan. Today I will stick to my plan because it is detailed, specific, tested and profitable. I am confident that I have the self discipline to adhere to it which, in turn, will ensure that my weekly, monthly and yearly goals are met). When I achieve the goal of sticking to my plan, my reward will be . . . (doing something nice for someone else or a bowl of ice cream). Trading Plan (Part 6) The intent of these lessons will be to guide the trader through a logical planning process to create a trading plan that can be refined over time. We’ll continue to tackle only a few concepts at a time, until we have a working trading plan. Your job, or homework, will be to take the examples and then use and fit them to your own trading skills and style during the week. Each section that we cover will have questions highlighted in blue for you to answer and a brief paragraph explaining what the question is trying to get at. Below that, you’ll find an example in italic lettering; this is where you will answer the question for yourself. TRADING STYLES AND PRELIMINARY SETUP First off, you’ll need to decide what kind of trading appeals to you. If you work during the day then position trading or swing trading may suit you best. However, if you have time to watch the markets during the day, as I do, then you may find that you prefer to day trade or scalp. Personally, I like to day trade when a market isn’t moving much and when it does start to trend then I switch over to swing trading. To decide what type of trading best fits your personality, I have listed below the different trading styles. Your job is to pick one or two and then write them into your trading plan. Position Trader A position trade can be characterized as a trade initiated to be an intermediate to long-term trading position. This type of trade is based on a weekly or monthly timeframe and has a potential time horizon as short as a few weeks to as long as several months or more. Swing Trader A swing trade can be characterized as a trade initiated to be a short to intermediate-term trade, typically based on a daily timeframe that has the objective of capturing stock or market swings lasting between a couple of days to a couple of weeks. Most traders define swing trades as a trade position that is intended to be held overnight, and commonly appeal to traders seeking to capitalize on multi-day moves without having to monitor their trades during intraday movements. Day Trader A day trade can be viewed as any trade initiated with the intent of closing the position entirely by day’s end (e.g., not holding overnight). Day trades can be thought of as primarily “intra-day” trades. This style of trading is usually perceived by some as the most aggressive style of trading. Scalp Trader A scalp trade is one in which a trader seeks to capture small to modest-sized profits, based on a smaller intra-day timeframe such as a 2-minute or 5-minute timeframe or off a NASDAQ Level 2 screen. Profits in scalps have been found to be best taken quickly, typically on the first meaningful move using momentum to lock in gains. A very fast trading platform is needed for this type of trading.
Why do You Want to be a Trader? Start by question your motivations for trading. Examine whether your talents would be better suited to another business or another use of your time. Are you certain that trading is the right business for you? If you think that the markets exist to provide you with easy money – then think again! Beware: it is NOT the easy option! I want to be a trader because . . . (I am excited by the challenge to be successful in a discipline that is notoriously difficult and where, allegedly, 90% of participants fail). My primary objective in wanting to be a trader is to . . . (generate sufficient annual income of in order to support my family). My secondary objective is to . . . (spend more time with my family and enjoy the independence of being able to trade from anywhere in the world). These objectives are important to me because . . . (they provide purpose and direction to my life and enable me to lead a more balanced one). I believe I can achieve my objectives because . . . (my name is Mike Coval - say no more!) What Sort of Trader are You? Do you propose to trade in the long-term (i.e. months), medium-term (i.e. weeks) or short-term (i.e. days or, even, intraday)? The choice of position trader, swing trader, day trader or scalp trader will, to a large extent, be determined by the amount of time you are able to devote to your business. My style is very . . . (aggressive - which makes me suited to scalping intraday or, alternatively, conservative – which makes me suited to swing trading end of day). I understand that I cannot predict the future and I accept that I cannot control the markets. However I can control myself, which I will do by . . . (adhering strictly to my trading plan that is detailed, specific, tested and profitable). Are You in the Right Frame of Mind to Trade? Your mindset is the key obstacle that lies between you and success in the markets. Have you slept well; are you fit, healthy and mentally alert? Are you calm and relaxed or are you tired and distracted by other events in your life? I will only trade on days when . . . (I am rested, relaxed and not distracted by work or family etc. I will be guided by my trading plan and I will adhere to it rigidly. It will help prevent me from making trades that are poorly considered and executed; i.e. trades that are based on gut feeing and motivated by fear and/or greed). I will not trade on days when . . . (I am feeling sad, hung over, tired or when I am mentally distracted by other events in my life). What are Your Income Targets? There are many reasons for becoming a trader; making money is the one reason that we all can agree on. It is important to know your financial goals and to break them down into daily/weekly bite size chunks. As the saying goes, ‘by the inch it’s a cinch - by the yard it’s hard’, certainly applies to traders. If your strategies only generate 10% a month, it is counter productive to have a target of 1% per day. Your targets are not idle fantasies; they must be based upon your back and forward testing results. My financial targets are . . . (to achieve a return of _____% per year, which equates to an annual income of $______ without the drawdown on my account exceeding a maximum of _____%. This equates to an average monthly income of $_____, an average weekly income of $____ and an average daily income of $___. Therefore, I have a daily goal of _____% of my total equity). Which Markets will You Trade? Decide upon the market or markets you wish to trade and the reasons for your choice. As a general rule of thumb, professional traders tend to restrict their focus to a limited number of markets and financial securities. Whereas, novice traders tend to trade index futures one day, currency pairs the next and stocks the following day. The securities that I will trade are . . . (U.S. stocks because they also provide excellent liquidity, volatility, tight spreads, fast fills, and low commissions). Which Instruments will You Trade? Will you confine yourself to a basket of stocks, heavy volume stocks or will you trade or whatever you see moving? If you trade futures, how many different markets will you trade, and why? If you are a Forex trader, how many currency pairs will you trade, and why? The quantity of stocks / futures contracts / currency pairs that I will trade will . . . (not exceed X and be determined
according to their liquidity, i.e. a minimum daily volume of 1 million shares, and according to their volatility, i.e. an average minimum daily range of $1.50). Which Timeframes will You Trade? Hopefully, by now you have decided what sort of trader you are or want to become. Now you need to focus in on your timeframes within the category of your choice. Be very clear in your own mind about the number of timeframes you use and why you use them. For example, a day trader may use a 1 minute timeframe to enter a trade, a 3 minute timeframe to exit a trade and a 15 minute timeframe to help determine the trend throughout the duration of the trade. As a swing trader, I will use . . . (daily charts to determine the trend; 10 minute charts to enter and exit positions and 60 minute charts to monitor my open positions). Which Broker and Trading Platform will You Use to Trade? Your broker and trading platform are vital to your performance. As a starting point, the choice of broker is likely to be determined by: My broker is . . .(We’reTheBest.com because they offer the stocks and futures that I require with competitive commissions; they have won numerous industry awards for their lightning fast trading platform and their customer service is second to none). Which Software & Data Feeds will You Use to Trade? If your trading decisions are based upon technical analysis, make sure your data provider and charting platform has the features you want but is not charging you for fancy items that you do not need and will not use. My data feed is . . . (GiveMeQuotes.com because they provide data for the securities I want to trade, and provide the option to upgrade, giving me access to other exchanges with real time data in the event that my trading style and strategies change). We have taken a look at the different trading style and some of the initial concerns that we need to address when we first start to trade. Your job is to find a trading style that fits in with your personal demeanor and define how you will position yourself to be able to take advantage of the trading opportunities associated with your trading style? Something else you might want to consider at this point is: will you be creating a trading business entity? If so, which legal form of ownership will it follow: Sole proprietor, Partnership, Corporation or Limited liability Corporation (LLC). Trading Plan (Part 7) The intent of these lessons will be to guide the trader through a logical planning process to create a trading plan that can be refined over time. We’ll continue to tackle only a few concepts at a time, until we have a working trading plan. Your job, or homework, will be to take the examples and then use and fit them to your own trading skills and style during the week. Each section that we cover will have questions highlighted in blue for you to answer and a brief paragraph explaining what the question is trying to get at. Below that, you’ll find an example in italic lettering; this is where you will answer the question for yourself. TRADING ROUTINE What is Your Daily Pre-market Routine? What is it that you do to get yourself ready to trade before the market opens? The four (or five) things that I do daily before the market opens are . . . (1. Analyze and log yesterday’s trades. 2. Review any open positions and update targets and stops. 3. Consider today’s market conditions and plan accordingly. 4. Create a list of potential stocks to trade). Have You Spent the Time to Analyzed Yesterday’s Trades? Did you set some time apart to review yesterday’s trades, making sure to record them in your trading journal? Did you stick to your trading plan, if not, why not? Each day, I will make sure that yesterday’s trades are . . . (analyzed and recorded in my trading journal. Furthermore, I will
check to make sure that I follow all aspects of my trading plan). Do You Have Any Open Positions? If your trading plan doesn’t allow you to hold positions overnight then make sure that you are out of the market by day’s end. This applies more for day traders and scalpers out there. However, if you’re a swing trader or position trader, then you may have some open positions that you’ll need to review and possibly update. If I have positions open in the market . . . (I will update targets and stop losses and confirm that the reasons for entering the trade in the first place are still valid). What are the General Market Conditions? Are there any major news stories impacting the markets? Is the Fed meeting today? What are the index futures doing? Are there any key economic reports due out and at what time etc.? Before trading, I will check . . . (The index futures to see if they are flat, trending up/down or mixed. This is a positive/negative sign because . . . Next I’ll check to see if any key economic reports are due to be released and at what time. I’ll also note any key announcements, such as a Fed meeting on interest rates. I am looking to trade the market reaction to these announcements. Therefore, I will not trade for . . . (the first 15 minutes following the speech / announcement and observe the reaction to it by the market. This will help me to “trade what I see and not what I think”). What Will You Do Hour by Hour? If you do not plan each day hour by hour, chances are that you will just aimless wonder from trade to trade (this applies more to the day traders and scalp traders out there). Not planning how you’ll use your time could result in missed opportunities or, worse still, departing from your plan and taking ‘boredom trades’. Be sure to factor in regular breaks from your computer. If you can’t trade because you are at work, then make sure that you at least call your broker or check your computer screen (on your break, of course) to see if your order was filled. Then make sure that you have a stop-loss and target price activated on your trade. As a day trader, I have a daily planner in which I plan out my time. (For example before the market opens, I’ll search for opening gap plays and load alerts. 30-minutes after the open, I’ll look for reversal trades. At 12:00 noon, I’ll eat lunch . . . and so on and so forth throughout the rest of the day). Which Stocks Will You Put on Your Watch List? Finally, you can review some of the stocks that you would like to trade today. Review the strategies that you will use for each stock trade. For example, if you are a day trader, you may have a ‘retracement’ strategy to trade the open, followed by a ‘30-minute breakout’ strategy after the first half hour. I will review the trade setups beforehand and set specific entry and exit points. (I will make sure I am looking at the correct time periods in which to set up my trades, this includes knowing where key resistance and support levels, yesterday’s open, high, low and close etc). Trading Plan (Part 8) The intent of these lessons will be to guide the trader through a logical planning process to create a trading plan that can be refined over time. We’ll continue to tackle only a few concepts at a time, until we have a working trading plan. Your job, or homework, will be to take the examples and then use and fit them to your own trading skills and style during the week. Each section that we cover will have questions highlighted in blue for you to answer and a brief paragraph explaining what the question is trying to get at. Below that, you’ll find an example in italic lettering; this is where you will answer the question for yourself. RISK MANAGEMENT Risk management should be one of the most important aspects that a trader should consider when trading. The trader should develop a clear set of rules on how to use and place stops. Stops are a critical ingredient of a trader’s formula for success. In placing stops, it is important to understand your trading philosophy. You have to determine whether you will physically place your stops in the market or you will keep them mentally. This is very critical in determining how your trading strategy will be executed.
What is Your Attitude Towards Risk? This may seem an odd question, but it is a good starting point to ensure that your feelings about risk are compatible with your trading style. Market risk is measured by the amount of time you are in the market. It could be seconds, minutes, hours, days or weeks. The longer you are in the market the greater the chance something will go wrong. Therefore, the trading style that keeps you in the longest could also potentially be the most risky. Many traders will totally disagree with this and feel much happier and sleep better at night by holding medium to long-term positions. We are all different therefore we need to define our own risk tolerances and not someone else’s. My attitude towards risk can be summed up as being . . . (risk averse and always seeking to minimize risk wherever possible. I will achieve this by diversification and adhering strictly to the risk management regime contained in this section of my trading plan). What is the Overall Market Risk? Now decide the maximum amount of capital that you will put at risk at any one time. Be prepared for the worst. In the event of a market crash or even another terrorist attack, having too much of your money committed to the market could result in catastrophic loss. Many traders will not risk more than 1% on any one trade, with a maximum exposure on all open positions of 5% in total. In other words, if all the positions you have open at any one time were stopped out simultaneously, the drawdown on your account would not exceed 5%. Again, we all have different levels of risk tolerance so your individual and total risk may be more or less. My maximum risk in the market will . . . (not exceed a combined total of 5% of my capital at any one time). What are the Broker and Hardware Risk? Here is one that you may not have thought about until it happens to you and believe me it will! Suppose your computer loses its internet connection or your computer screen gets a virus and slows down to a crawl, what will you do? What is your backup plan? For these reason alone, I will never work with a broker that I can’t call on the phone should something happen to my internet connection or my computer. I always trade on line but I know that I can also pick up the phone and call my broker to get out of a trade should I need to do so quickly. My main broker is . . . (WeGotYourMoney.com. In severe circumstances if my computer goes down, I have the option of picking up the phone and placing a trade. I also have a fully charged cell phone ready should my land line go dead. I have handy the phone number of my brokerage account and I know my account number). What is Your Risk per Trade? So much has been written on this subject that there are many way to determine your risk. Here is just one example: Let’s say that we have $200,000 total risk capital available. Since we know the risk of trading the markets, we invest $120,000 in diversified investments like gold or some other favorite vehicle. This leaves us with $80,000 to trade in the markets. Of the $80,000 capital we will not risk more than 30% in the market at any given time and we will not risk more than 10% ($8,000) on any one trade. With $8,000 invested we will not risk more than 10% of that money on a “disaster stop” – more likely it will be a 5% stop or $400 for most trades. So initially, with a total risk capital of $80,000 we may risk a maximum of three trades at any given time, with an absolute maximum risk of $800 in each trade. With a strategy like this we know that we will be trading for a long time even with a string of losses. Or you may keep it simple like: not risking more than 1% of your total equity on any one trade, unless your account size is very small – then this figure may rise to around 3%. For every trade I enter, I will not risk more than . . . (3% of my total equity. For each trade I will identify the ideal stop loss point and vary the number of contracts/shares to ensure that I do not risk more than 3%). Where Will You Place Your Stop Loss Orders? Every trade you make must have a stop-loss. This will ensure that all losses are cut short. I prefer to make it market controlled and not a fixed percentage (i.e. 3%) of your equity. For example, if you trade pullbacks, and your strategy dictates that you place your stop-loss just below the low of the pullback, then that is where it should go. You may need to change the number of contracts / shares to ensure that you remain within the risk per trade parameters as defined above. For every trade I enter, I will decide in advance where to place my stop-loss in the event that the trade goes against me. Its placement will be governed by. . . (the type of trade; i.e. tight for a scalping strategy and wide for a swing trade strategy). When Will You Stop Trading?
Trading just to trade is a bad idea! Knowing when to stop trading is both good discipline and good risk management. This helps to prevent chasing losses on losing days and helps to prevent greed from rearing its ugly head on winning days. Every single trading day should end in one of three ways: 1. On a winning day, you have a very simple rule for stopping trading once you have reached your target. 2. On a losing day, you have a daily stop and cease trading as soon as it is hit. 3. Some days there are not any trading opportunities to be had, so you do not trade at all. 1. Upon reaching my daily target I will stop trading . . . (after the first losing trade). 2. Before reaching my daily target I will stop trading . . . (after two losing trades). To ensure further that my losses are kept to a minimum, I will . . . (have a maximum daily stop of 3% of my equity). 3. I will not trade at all on days where . . . (I do not see the setups and entry triggers, exactly as specified in my plan). Trading Plan (Part 9) The intent of these lessons will be to guide the trader through a logical planning process to create a trading plan that can be refined over time. We’ll continue to tackle only a few concepts at a time, until we have a working trading plan. Your job, or homework, will be to take the examples and then use and fit them to your own trading skills and style during the week. Each section that we cover will have questions highlighted in blue for you to answer and a brief paragraph explaining what the question is trying to get at. Below that, you’ll find an example in italic lettering; this is where you will answer the question for yourself. As a review, last week we talked about risk management. This week, we’ll continue with our discussion of managing our money by looking at some general money management principles. GENERAL MONEY MANAGEMENT Trade Limit For any given trade, the trader will not lose more than $X. If your last trade losses are greater than this preset amount, then you should determine what course of actions you will take. These actions will likely force you to stop trading for the rest of the day. This means that you should shut down your trading platform FOR THE DAY. You then should determine how the free time well be spent. You might want to re-evaluate the strategy that lead to your loss and make any changes if necessary, and then paper trade until you are certain that the strategy continues to work. Weekly Limit For any given trading week, you will not lose more than $X. If your weekly cumulative losses plus your last trade losses are greater than this predetermined amount, then you should decide what course of actions you will take. These actions should probably include terminating the rest of your trading for the trading day and the trading week. Again, you will shut down your trading platform FOR THE DAY and refrain from trading the REST OF THE WEEK. You should then decide on how the free time should be spent. Suggestions might be to re-evaluate the strategy, incorporate any changes if necessary, and paper trade until you are confident that the strategy continues to show a consistent profit. Monthly Limit For any given trading month timeframe, you will not lose more than $X. If your cumulative monthly losses plus your last trade losses are greater than this predetermined amount, then you should decide what course of actions you will take. These actions should probably include terminating the rest of your trading for the trading day and the trading week and the remainder of the month. You will shut down your trading platform FOR THE DAY, FOR THE WEEK, and FOR THE REST OF THE MONTH. You should then decide on how the free time should be spent. Suggestions might be to reevaluate the strategy, incorporate any changes if necessary, and paper trade until you are confident that the strategy continues to show a consistent profit. How Will You Handle Large Losses and Profits? Your trading capital must be money that you can afford to lose. You need to determine at what point you will bring in more money in the event of a large loss. In addition you’ll need to define when you will take money out of your account as your profits increase. In the event of a large loss, I will . . . (only credit additional funds to my account with ‘spare’ money that I can afford to lose. I will not start trading again until I have known the cause of the loss and have re-tested the strategy to ensure that it meets my trading goals). When my trading account exceeds the amount I need to trade my strategies, I will . . . (withdraw the surplus and give it to my wife, (ha) or put in the bank for a rainy day).
How Will You Determine Your Position Size? The size of your position should never exceed the limitations listed in your risk management rules. Something you might want to consider is that some strategies might have a high probability of success (e.g. trend continuation strategies) which enable you to adopt a more aggressive position size at entry. Other strategies might have a lower probability of success (e.g. reversal strategies) and your risk management rules may only allow for a more conservative position size at entry. However, once the trade and the new trend are established, you might want to think about adding to the position at predetermined continuation signals. This potentially allows you to increase your position size while at the same time maintaining a very low exposure to risk. I am a scalper so this approach does not apply to me! I am a swing trader and I will build my position by . . . (adding X contracts or shares at the next continuation pattern). As my trading account grows, I will . . . (increase my position size to a maximum of X contracts or shares and still remain within the limitations of my risk management strategy). Trading Plan (Part 10) The intent of these lessons will be to guide the trader through a logical planning process to create a trading plan that can be refined over time. We’ll continue to tackle only a few concepts at a time, until we have a working trading plan. Your job, or homework, will be to take the examples and then use and fit them to your own trading skills and style during the week. Each section that we cover will have questions highlighted in blue for you to answer and a brief paragraph explaining what the question is trying to get at. Below that, you’ll find an example in italic lettering; this is where you will answer the question for yourself. As a review, last week we talked about general money management. This week, we’ll continue with our discussion of managing our money by looking at some specific money management principles. SPECIFIC MONEY MANAGEMENT This section should outline the questions traders might want to ask after they have entered into a trade. Once a trade starts to move in your favor, consider defining clear objectives of how you can use stops to give back only some but NOT all of your profits. Each trading strategy should have a suite of risk management tools, including stops associated with it based on the trader’s style and philosophy. Let’s take a look at some of the different types of stops. Fixed Dollar Stops are orders used to limit the specific dollar amount that can be potentially lost on a trade. Percentage Stops are orders used to limit the percentage of capital allocated to the trade that can potentially be lost. Timeframe Based Stops are orders that are composed of a time dimension that upon expiration will close out the trading position. Technical Analysis Based Stops are orders that are derived from some technical measurement that is a derivative of price and volume. These stops are based on a variety of technical techniques that should be reviewed in more depth by a trader to determine if and how they should be used. Some variations of technical stops include trailing stops and breakeven stops which may be fixed-dollar based, percentage based or timeframe based. Breakeven Stops In the markets, there is always the possibility of adverse movements. Once traders learn to cut the losses, they then sometimes start to realize the necessity for having rules and criteria for when to move these stops as the security moves in their favor. This section should include clear rules and criteria for when to move an initial stop-loss up to the breakeven point. Trailing Stops Holding on to profits is just as important as cutting losses. To protect your profits, the trader should predetermine what method to use for preserving the profit. One method is to use a trailing stop framework. The trailing stop can be any one of the previously defined stop techniques described earlier. The important idea here is to preserve your profits. The focus on trailing stops is that they should be used in most instances when the trade moves strongly in your favor, hopefully to lock in gains. Will You Use a Trailing Stop to Lock In Profits? Using a trailing stop to lock in profits once the trade is on the right side of breakeven has two clear advantages. 1) At
worst, you may end up with a breakeven trade. 2) At best, it allows profits to run which enables you to take a generous amount out of the expected move. I will use a trailing stop which I will position . . . (X points below the lower high in an uptrend or Y points above a higher low in a downtrend). Losing trades - Will You Exit Before Your Stop is Hit? Some strategies always exit the trade at the point that the stop- loss is triggered and not before. The advantage of this approach is that it allows you some extra ‘wiggle’ room, which may result in a profitable trade. Conversely, the downside is that your losing trades are always at the maximum allowed by your strategy and, in the event of a bad fill, may even exceed the maximum. If the trade goes against me, my exit strategy permits me to . . . (close the trade early if the conditions below are met). Losing trades – Which Signals Will You Use to Exit Early? If you choose to close the trade before your stop-loss order is filled, what are the signals that will trigger your exit? If the trade goes against me, I will exit before the stop-loss order is filled . . . (if the price does not move X points in my favor by the close of the next price bar following entry). Winning Trades – Which Signals Will You Use to Exit Completely? There will be times when it is advisable to get out – and fast! Be prepared for those occasions and know in advance what signals to watch out for. I will close my whole position immediately . . . (upon the price crossing the XYZ moving average). Winning Trades – Which Signals Will You Use to Closeout Half of Your Position? An accepted approach is to close half your position at the first target or at the first sign of weakness and let the other half run. I will close half my position . . . (upon a X% increase/decrease in volume compared with the previous price bar). Winning Trades – Which Signals Will You Use to Close the Remainder of Your Position? Even if your exit strategies are well planned and executed, the success of your entire strategy could still hinge on how you exit the second half of a profitable trade. I will close out the second half of my position . . . (at the very end of the day, based on my research which indicates that on trending days, my instruments close within X% of the high of the day). Trading Plan (Part 11) The intent of these lessons will be to guide the trader through a logical planning process to create a trading plan that can be refined over time. We’ll continue to tackle only a few concepts at a time, until we have a working trading plan. Your job, or homework, will be to take the examples and then use and fit them to your own trading skills and style during the week. Each section that we cover will have questions highlighted in blue for you to answer and a brief paragraph explaining what the question is trying to get at. Below that, you’ll find an example in italic lettering; this is where you will answer the question for yourself. As a review, last week we talked about general money management. This week, we’ll continue with our discussion by talking about discipline. DISCIPLINE Back Testing and/or Paper Trading? Before you start with live trading, it is important to test your trading strategy. If you are a mechanical trader, this can be done mathematically with programs like TradeStation and, even, MS Excel. Once you have back tested your strategy
you’ll want to start paper trading. Paper trading will not reflect how you will trade in real time, but it will indicate whether or not your basic strategy is profitable or still needs some work. Before I start ‘live’ trading with real money, I will . . . (back test and/or paper trade my strategies to make sure that they are tradable and meet my profit objectives without exceeding my risk and money management parameters). What Agreements Have You Made With Yourself? These are promises that are designed to enforce self-discipline. What will you require of yourself if you break one of your trading rules? If I break one of the rules detailed in my trading plan I will . . . (stop trading for a full day and focus on the reasons why there was a lack of discipline). What Will You Do After a Winning Trade? After a winning trade, there are some questions that need to be answered before moving on to the next trade. Did you do everything right; was the trade well planned and executed? Although it was profitable, could you have extracted more profit while still adhering to your exit strategy? Your next trade could be a flop: are you sufficiently calm and relaxed to continue trading or should you take a break? After a winning trade I will . . . (1. I will guard against over confidence and make sure that my attitude remains consistent. 2. I will check to see that I did everything as well as I could. 3. I will remind myself that executing the trade according to my plan is more important than the outcome of the trade). What Will You Do After a Losing Trade? Repeat the process above after a losing trade. It is acceptable, desirable even, to regard a losing trade as a successful trade – IF – you followed your plan. You know that you will have losing trades; all traders have them. There is no reason to lose confidence as long as you manage the losses and keep them small. Are you ready to continue trading in a calm and relaxed way or are you now subconsciously chasing the loss? After a losing trade I will . . . (1. I will examine the trade and learn what I can from it. 2. I will check to make sure that I executed all areas of the trade in accordance with my plan. 3. I will evaluate my state of mind to ensure that I am calm, relaxed and ready to enter the market again with an unemotional and professional attitude). What Steps Will You Take to Continue to Learn More About Trading? Practical experience is essential. However, it would be wise to complement this with additional learning and studying. The hard part is to plan a course of study to ensure that your valuable time is spent in a focused way to increase your knowledge as quickly as possible. Trading is such a huge subject that one way or another, but it is vital to ensure your precious time is concentrated on the ‘right’ material. I will make sure that I devote X number of hours per week learning more about trading . . . (Some of that time will be spent reading and some of that time will be spent taking additional trading courses or learning from financial websites, like Incometrader.com). Trading Plan (Part 12) The intent of these lessons will be to guide the trader through a logical planning process to create a trading plan that can be refined over time. We’ll continue to tackle only a few concepts at a time, until we have a working trading plan. Your job, or homework, will be to take the examples and then use and fit them to your own trading skills and style during the week. Each section that we cover will have questions highlighted in blue for you to answer and a brief paragraph explaining what the question is trying to get at. Below that, you’ll find an example in italic lettering; this is where you will answer the question for yourself. As a review, last week we talked about discipline. This week, we’ll continue with our discussion by taking a look at trade strategies, setups & entries. TRADE STRATEGIES, SETUPS & ENTRIES Which Strategies Will You Use to Trade?
Most successful traders have at least two different trading strategies, one for a trending market and one for a non-trending market. My primary trading strategy is designed for a trending market. It is a . . . (breakout strategy, which is intended to join in the continuation of a strong trend, I will take advantage of this via chart patterns or a penetration of trendlines). My secondary trading strategy is designed for a non-trending market. It is a . . . (retracement strategy, trading stocks that gap up/down at the open. The premise is that the market tends to over react to news, be it good or bad, causing the price to become over extended. Subsequently, it then reverts to a more evenhanded degree and the gap is often filled). What are Your Trade Setups? A setup is the set of circumstances that help you to identify a high probability trade prior to your entry point being triggered. Try and keep the indicators you use for your setup as simple as possible. Otherwise, you will end up second guessing yourself and not make any trades. It is essential that your setups are clearly defined and thoroughly tested prior to live trading in order to determine your chances of success. This cannot be over emphasized, so much so in fact, that failure to define and test your setups will largely invalidate your trading plan and render useless all your work thus far. It is one of the characteristics that separate the professional trader from the proverbial gambler. The setup for my primary strategy is made up of the following items . . . (1. Price must be in a clear up / down trend according to my definition of a trend, which is . . . XYZ. 2. Price breaks through yesterday’s high / low of the day to make a new high / low. 3. Price pulls back to yesterday’s high / low but does not breach it). The setup for my secondary strategy comprises the following elements . . . (1. Opening gap is 2 to 3 points from prior day’s close. 2. The gap should be into resistance / support, such as a moving average, pivot point or trendline, but not breaching it. How Will You Find Your Trade Setups? If your trading is confined to one or two stocks, this is easy! However, if you trade stocks listed on the NASDAQ or NYSE, for example, then you will probably need some sort of scanning software to find the setups that you want. I will find the setups that I want by . . . (using the XYZ stock scanning software from FindYourTradesForYou.com. I will program the scanning software to look for … as defined by my trading strategy). Which Signals Will You Use to Trigger Your Entry? Clear, precise and statements characterize a good trading plan. In answering this question, it is vital that there is no room left for ambiguity. In other words, if 100 traders read your answers to this question, would they all try to enter your trades at the same time and at the same price? The entry trigger for my primary strategy is . . . (to go long when the stock resumes the direction of the trend and hits yesterday’s high on a 5 minute chart. I will use the opposite for a short trade). The entry trigger for my secondary strategy is . . . (to go long after a 2 to 3 point gap lower has been filled and the prior day’s closing prices is penetrated by one tick. The opposite for a short trade). Trading Plan (Part 13) The intent of these lessons will be to guide the trader through a logical planning process to create a trading plan that can be refined over time. We’ll continue to tackle only a few concepts at a time, until we have a working trading plan. Your job, or homework, will be to take the examples and then use and fit them to your own trading skills and style during the week. As a review, last week we talked about trade strategies, setups & entries. This week, we’ll continue with our discussion by taking a look as some specific trading rules. TRADING RULES Entries – Long Go ‘Long’ if the following conditions are met.
Daily MACD Signal (Blue Line) crosses above 9 period EMA (Red Line)
and… DMI+ above DMI(Green above Red)
ADX > than DMI(Blue above Red)
and… Weekly MACD Histogram is > than previous week
or Once these conditions have been met, buy at Open the next trading day. Entries – Short Go ‘Short’ if the following conditions are met.
Note: It doesn’t have to be above the 0 line, it just needs to be moving in the direction of the intended trade.
Daily MACD Signal (Blue Line) crosses below 9 period EMA (Red Line)
and… DMI- above DMI+ (Red above Green)
ADX > than DMI+ (Blue above Green)
and… Weekly MACD Histogram is < than previous week
Note: It doesn’t have to be below the 0 line, it just needs to be moving in the direction of the intended trade. or Once these conditions have been met, sell at Open the next trading day. Entries – Exceptions to the rule Sometimes discretion needs to be applied to entry signals, to ensure the high percentage of winners is obtained. Exception – MACD Cross moves RSI into extremes. This exception occurs when the buy trigger forces the RSI > 70 or a sell trigger pushes RSI < 30. As a review, the RSI Index itself indicates: Tops and bottoms: These are indicated when the Index goes above 70 or drops below 30. The Index will usually top out or bottom out before the actual market top or bottom, giving an indication that a reversal or at least a significant reaction is imminent. Failure swings: Failure swings above 70 or below 30 are very strong indications of a market reversal.
Exits - Stop Loss A stop loss is a safety mechanism to ensure any losses are limited to a given amount. It is also necessary for this trading plan to measure the risk associated with a given trade, and the stop loss is a key component of this.
Stop is placed 3% - 5% below significant support level
Stops should always be tightened (closer to price action), and never be loosened (further away from price action)
Stop is placed 3% - 5% above significant resistance level
Stops should always be tightened (closer to price action), and never be loosened (further away from price action)
Exits - Over Bought/Sold When prices move in the direction of the trade, they can become overbought and oversold.
Prices hit upper band of the Keltner Channel with a MACD rollover
When this occurs move stop one tick below daily low price Prices hit the lower band of the Keltner Channel with a MACD rollup
When this occurs move stop one tick above daily high price Note: There should be times when a trader’s strategy meets the conditions for entry but additional conditions warrant the
trader to ‘stay out’ and skip the trade. You see how this section can become very detailed. You can also list target prices and other reasons to exit based on various technical indicators or new events that would have a negative impact on the stock’s price.
Trading Plan (Part 14) The intent of these lessons will be to guide the trader through a logical planning process to create a trading plan that can be refined over time. We’ll continue to tackle only a few concepts at a time, until we have a working trading plan. Your job, or homework, will be to take the examples and then use and fit them to your own trading skills and style during the week. Each section that we cover will have questions highlighted in blue for you to answer and a brief paragraph explaining what the question is trying to get at. Below that, you’ll find an example in italic lettering; this is where you will answer the question for yourself. As a review, last week we talked about trading rules. This week, we’ll continue with our discussion by taking a look at the trading diary and record keeping. TRADING DIARY & RECORD KEEPING It is important to carefully track the performance of each of your trade setups. If you notice that certain trade types are no longer working well, you will be in a good position to adjust the style to the market conditions because the markets are always changing. At times they are choppy and at other times they are trending. You should have a trading strategy for each of these types of markets. This section should outline all the necessary steps required for your record keeping. Comments on items such as how new types of trades will be initiated with minimal share size and precise records keeping are essential for a testing process. Have You Recorded the Day’s Trades? After the market closes you’ll want to record all your trades, this is a must and it is something all professional traders do routinely and in detail. Details that include: entries, exits, stops, targets, support / resistance levels, open / close, high / low of day, duration of trades and key lessons learned. After the market closes, I will . . . (1. examine each trade and write down the following details . . . XYZ. 2. Annotate a chart and put it in a notebook for future reference). Did You Execute Your Trades According to Your Plan? It is tempting to pass over this question. Don’t! If you are not routinely executing trades in accordance with the plan, then you either have a serious problem with self-discipline or there is a problem with your plan. Either way, you have a BIG problem and one that needs to be addressed immediately. In addition to recording all my trades, I check to . . . (confirm that all trades are executed in accordance with my plan. If they are not, I will assess if the reason is a fault with the plan itself or a discipline issue and take action accordingly). Do You Have A Trading Journal? Your trading plan is designed to ensure that you trade unemotionally. If you struggle with this, then consider a mechanical strategy. Your trading journal is the one place where you can vent your emotions and express your feelings. I regularly update my trading journal with . . . (my thoughts and feelings about each trade, the good and the bad and my conclusions about the day as a whole). Here are some more thoughts: TRADING PERFORMANCE REVIEW Having a trading plan is vital to a trader’s success and reviewing the impact of your trading plan against your trades is
extremely important. This section should outline all the steps to be taken to review your trading performance. Each trade should be reviewed with some reasoning similar to the following: 1. Keep a list of winning trades and a list of losing trades to see where, on average, your profits and your losses are. In other words, “what’s your batting average?” Understand your largest winning trades and largest losing trades and what, in your strategies, is the reason. Understand the frequency at which your trading strategies are generating signals for you to execute trades. Create a list of different categories for your errors and map all your trades into one of the categories. Use this to help identify what areas need immediate attention to improve your trading while other areas may need less attention.
2. 3. 4.
Other considerations for review can be how often your trades reached the target or stop. How often did you follow your trading plan, how often did you deviate from it. Are your emotions attached to your trades? Because trading is largely a solitary occupation, you will need to be responsible for your own trading growth. Achieving objectivity is a difficult prospect. You will accomplish trading excellence by regularly analyzing your own strengths and weaknesses. Keeping a trading diary is one way to remain objective. All of the most successful traders use some form of recording their trade history. A simple 4 ring binder will do. Before entering a trade, record all of your thoughts and analysis. Unless you can justify a trade on paper, don’t enter the position. After each trade has been completed, write down your profit, your loss, the amount of time that you held the trade and the main lessons that you have learned. After making a profit or a loss record what you did well and what you would do differently. Unfortunately, some traders must go through some sort of catastrophe to finally get their attention, and make an effort to improve their system. A single experience that is so excruciatingly devastating that it results in an instant change in behavior – pain can be a great motivator. A quick whack to the side of the head can sometimes be the best thing to ever happen to you, as long as your head doesn’t get completely knocked off in the process. Trading Plan (Part 15) We have finally reached the point in the trading plan where you now have to put all the pieces together by writing out the details. The intent of these lessons was to help you build a trading plan specially suit to your own trading style and experience. As you can see by the length of these lessons it’s not a process that you can be done in one sitting. Even then, once you have spent the time necessary to develop your trading plan, you’ll find yourself making small adjustments as your needs change. As a review, last week we talked about a trading diary & record keeping. This week, we’ll finish up by taking a look at how we might refine our trading plan. REFINING YOUR TRADING PLAN This generic trading plan should be modified to suit your specific type of trading style for which the plan is written. Be mindful of the following tips as you customize your plan for your future success. 1. Treat your trading as a business. Learn to become more selective in the quality and quantity of trades you execute as a trader. Overtrading is one of the biggest traps that a trader can find him or herself in and requires significant discipline to overcome. Use your performance to determine when and how often you should trade. 2. Review your trades to determine what works and what does not work. Make the necessary changes once you determine what does not work. Initially, learn to use your strategies to find a very selective subset of strategies (or one) on which you can focus and concentrate your efforts. Review your performance measurements and trading statistics to determine where your strategies need improvement. 3. Continue to set reasonable trading goals. Monitor and eliminate the need to trade for excitement and the anxiety of missing trade setups that lead to big moves. 4. Tackle the easy problems first by using your trading strategies distinctive list of errors. Your distinctive list of errors should provide numerous areas of improvement that allow you to refine your trading plan for many years to come.
If you have got this far and answered all the questions – CONGRATULATIONS! You are now among a minority of traders who have a detailed and tested plan. Your future success as a trader is by no means guaranteed, but by completing this process the odds have shifted significantly in your favor. Chris Coval email@example.com
Long Term Strategies
40-50% of portfolio Collars LEAPS Covered writes/straddles Long stock Long term calendars
30-40% of portfolio Condors Calendar spreads Double calendar spreads Double diagonal spreads ATM butterflies
10-20% of portfolio Long calls and puts Diagonal spreads Directional butterflies Vertical spreads Directional calendar spreads Long straddles
Per Dan Sheridan 10/18/07 CBOE TV