Trading Strategies: Plan Your Trade And Trade Your Plan

Part I: How To Build A Complete Trading Plan

You’re probably asking yourself why you’d need a trading plan. A trading plan will help you deal with your emotions, manage risk, and budget your time. You can’t control the market, but you can control yourself. This is the essence, the reason for having rules.

The trading plan is vital to help you think through and manage the risk you’re about to assume. A trading method is the manner in which you react to set-ups and signals to actually take a trade. Discussing trading methods will occur in Part II of this article series.

A sound plan coupled with a successful method will propel you toward the success you’re hoping to achieve in any market from find weaknesses in your plan to stocks. Here’s an example of a trading plan and trading method working together. Imagine you had purchased 100 shares of AAPL at $200 per share – no small cash commitment, but only 1% of your total trading capital. What if AAPL fell $5.00 per share, how would you feel? But what if you had a trading plan that said you’d cut your losses if price exceeded the lowest low of the last three days, at $192.50. Of course you’d be anxious, but you obey your rules and stick with AAPL. The next day AAPL climbs $15.00 on news that Steve Jobs signed a new multi-year contract! Your method dictates that you sell ½ of your position when the stock moves greater or equal to %5 in one day. You sell 50 shares at $215 and bank $750 in profit before commissions.

Conversely, if AAPL fell to $191.75 your method instructs you to cut your losses because the three day low was broken. You immediately place an order to sell all shares. AAPL continues to fall as news is learned the Steve Jobs is leaving the company. Over the next few days the stock settles at $179.33.

These two contrived examples demonstrate that a good plan will keep you from losing all your capital – you risked only 1%. A sound method can make you profitable. When both components are in place and utilized you’re on your way to success.

A trading plan will also allow you to monitor your progress and forex Seeing a mistake is easier to correct than guessing what went wrong or chalking it up to “bad luck”. For example, maybe you’ll decide that1% of your capital is too much to risk per trade.

When you control your actions and reactions by following your plan you’ll have more success quicker than someone without a plan. Rules will eliminate stress, confusion and knee-jerk reactions. A sound trading plan will lead to consistent profitability, discipline, and repetition — hallmarks of successful traders.

Know Thyself

This list is not complete, but here are some important questions you need to seriously consider.

The most important question is “how much can you afford to lose?” Don’t ever trade money that would alter your life if you lost it. Trading capital is expendable capital. Decide the amount of money you could afford to lose.

Consider what portion of the overall capital you’ll have at risk in the market at one time. For example, some traders will risk 1% of their total capital per trade. Others might risk a total of 20% of trading capital at one time on all open trades.

Money mangement and risk are the most serious aspects that you must consider. If you can manage your risk and obey the rules of your trading plan you will have success. Fail to manage your risk and lose your trading capital your trading career will come to an end.

What kind of a trader do you want to become? If you want to day trade you almost need to be in front of the monitor during market hours. Maybe you have a full-time job and can only devote a portion of your time to trading. Think about how many hours per day you can devote to researching and analyzing data. This will tell you realistically what type of trading you can manage.

Does your personality allow for discipline and repetition? Or are you looking for a heart-pounding, adrenaline rush? Increasing your heart rate by trading is a great way to decrease your capital. Make sure you’re aware of this.

Knowing the answers to these questions will save you a lot of grief. Trading is not as glamorous as the media portrays – it’s a lot of work and repetitious behavior. If you want to make money, can follow rules without question, then you can become a successful trader.

What market(s) are you going to trade? Are you going to trade options, stocks, currency, or cotton? Successful traders concentrate and learn to trade well only a couple of markets – new traders try all the markets thinking they will eventually find success.

What broker and platform will you use? Your account size will probably determine this answer. Make sure the platform (supplied by the broker) has what you need. For example, if you trade from fundamental analysis or technical tools make sure they’re available from your broker.

Also know the level of support and customer service you’ll receive. How easy is it to contact support and how responsive are they? Are there any “Getting Started” tutorials you can watch in advance of signing the account agreement?

Know your pre-market and post-market ritual. Both take time. Pre-market might include updating stops, assessing the market’s pre-opening numbers, and writing trade orders.

Post-market work is vital to success – you can’t prepare your day the morning the market opens. So how much time will you allot for market analysis, monitoring your open trades, finding new trade candidates, looking for set-ups?

You’ll need to keep records. Don’t rely only on your broker to record the trades you’ve made. Keep your own records and you’ll have a better understanding of profit and loss. You’ll also see the cost of doing business, i.e. commissions, exchange fees, etc.

Your trading plan is an unbreakable set of rules. When you first start you’ll reorganize, re-think, and restructure your plan as you find problems. That’s normal. Keep fixing the weak points and you’ll soon have a decent plan.

Remember, successful traders are all about discipline and repetition. If you can master those attributes, you too can become a successful trader.

Good luck!

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