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Your trading plan is a tool that you shape to suit your personal trading style. You can include anything that you find useful, but working through the following steps should provide all the essentials you need.
1. Know Yourself as a Trader
“I agree that many of the typical reasons people are
motivated to trade—the action, euphoria, desire to be a hero, the attention one can draw to himself by winning, or the self-pity that comes from losing—create problems that will ultimately detract from a trader’s performance and overall success. But the true underlying attraction to trading is far more fundamental and universal. Trading is an activity that offers the individual unlimited freedom of creative expression, a freedom of expression that has been denied most of us for most of our lives.”-Written by the Late Mark Douglas in his famous book, ‘Trading In The Zone’
First and foremost, you should be able to complete this sentence: ‘I want to be a successful trader because…’
Secondly, you should honestly assess your strengths and weaknesses, with regards to trading specifically, but also any personal traits that might influence your trading.
Some Example of Strengths and Weakness are:
a) Being Tidy and Organized
b) Living on a Schedule
c) Hating to be proved wrong
d) Being Systematic
e) Hating to lose money
f) Being Frugal
g) Believing too much in the Old
h) Being a Calculative and Mathematics Expert
i) Hard Working
j) Getting Distracted Easily
k) Ability to stay Focused
l) Ability to follow Instructions/ Steps
m) Doing things Randomly
n) Expecting Magic
o) Fun Loving – loving lots of action
p) Listening to/ Believing Others
q) Always looking for new avenues
r) Penny wise Pound foolish
s) Expecting the world/ environment/ market to follow rules
t) Detached from Money
u) Too Attached to money
v) Blaming Others
w) Blaming Yourself
x) Being an Attention/ Pity seeker
y) Reluctant to learn new skills
z) Adamant to make old systems work instead of moving on to new ones.
Each of the above characteristics can be a blessing or a curse to your trading profits. Extremes of any nature are detrimental to your success. The reason I gave the above list is not to label you, but to give you a eye-opener if one of these are hurting your profits or your life.
2. Define and Understand Your Trading Goals
“If your goal is to be able to trade like the professionals, you must be able to see the market from an objective perspective, without distortion. You must be able to act without resistance or hesitation, but with the appropriate amount of positive restraint to counteract the negative effects of overconfidence or euphoria.”– Mark Douglas
Setting your trading goals is one of the most important steps in developing a trading plan. It is also the step that most people neglect. You should try and be as specific with your goals as possible, both in terms of profit and timeframe. Time frame is the most important aspect. Only by defining and quantifying your goals will you be able to measure how far you’ve achieved them.
Most trading plans suggest you identify detailed trading goals on a daily, weekly, monthly, six-monthly, annual and lifetime basis.
It may strike you as silly or impossible to come up with daily trading goals, or pointless to try and settle on a lifetime trading objective. But, more than the actual outcome, it is the thinking that goes into these goals that is important and ultimately beneficial.
3. Identify Types of Trading that Interests You
You have several options available to you when you are considering trading on financial markets. Some people prefer to stick to a single trading method; others have successfully incorporated different trading types into the same plan.
Whatever route you decide to take, the most important thing is that you understand your options beforehand and make a decision, as part of your trading plan, to stick to a particular system.
Of course you can adapt your trading plan as you develop as a trader, but what you want to avoid is trying out a new type of trading on a whim without doing the research to see if it suits your trading style.
4. Define Your Markets and Trading Timeframes
One prime consideration is your level of knowledge on particular markets (be it company shares, commodities, indices, foreign exchange) and the factors that drive them. The more you know, and the more you are interested in the subject, the greater care you will be able to take.
You should consider when these markets are open and whether you will be able to offer them the proper attention at important trading times. Define whether you want to stay in the trade or be outside the trade in high volatility periods.
Trading Style is also influenced by the availability of time and the geographical time-zone you live in. When you live in Singapore, US markets start at night. Trading replaces the ‘junk’ on TV only. From 9 pm to midnight, it is easy to day trade and look at 15 min and 30 min candles. US opening and London opening are the action, high volatility times for the market. If you live in New York and have to be at work when the market is opening, looking at 15 minute and 30 minute candles may be impossible.
5. Establish Your Personal Trading System
A trading system will apply a series of rules to make trading into an almost automatic process. You’ll need to decide whether you would prefer your trading to be mechanical, where you pick a trading system and let it guide all your trading decisions; or discretionary, where you make decisions on a case-by-case basis.
If you decide to use a trading system, it should include:
Set ups – the conditions you look for in a market that you think give you a high probability of a successful trade. It can be useful to have a clear idea of the set-ups on which you like to trade – such as following higher highs, lower lows or moving averages.
Trigger points – the precise moments that you want to trade on – such as a market moving through a new high or low.
6. Know What You Are Willing To Risk
Risk management is possibly the most important aspect of your trading plan. Techniques for managing your risk are covered in our managing risk module, but they certainly play an integral part in any trading plan.
From a trading plan perspective, it is important that you consider your money and risk management rules, establish them to suit your trading style, and stick to them through good and bad trading times.
Good questions include:
What proportion of my account am I prepared to risk on each trade?
How many positions am I prepared to run at any one time?
What is the maximum account exposure I am prepared to accept?
7. How to React to Sudden Higher than Expected Profits and Losses when the Trades are Still On
This aspect of the trading plan deals with your handling of your open positions. This is when you can be most subject to emotional responses – you see the market drop, and you want to cut your losses, or the market spikes and you feel tempted to hold your position even longer.
In these emotionally charged situations it is essential to already have a strategy in place that you can call on.
8. Know How You Plan to Keep Records of Your Trading
It’s amazing how often people neglect this aspect of the trading plan, especially as it can be such a vital learning tool. If you regularly update a document of all your previous trades, including various details that made them successful or not, you can only learn from these in the future.
A simple spreadsheet is all the record you need to keep, but a comments section is particularly useful. Include everything from how well you stuck to your strategy, and what worked and what didn’t, to how you felt on the day or at the time.
You may be pleasantly surprised at how easy it is to identify successful trends and then repeat them in future trades.
9. Test Your System
You can back-test the system you have chosen against historical data, to establish whether it would have held up against recent market movements. You can do this manually, or there are various facilities set up by certain financial services providers to do it for you.
Another testing option, offered by some financial services providers, is a demo account. Depending on the provider and your preferred means of trading, you can actually set up an account with imaginary funds and implement your trading strategy for a limited time to test its viability.