Traders talk a great deal about their “plans” and “strategies”, but in reality, when pressed, these can turn out to be pretty vague.
There’s no doubt that discipline is important in trading – if for no other reason, we need to be able to track what’s working and what isn’t, so we can follow the most profitable route.
If we’re trading on whims without a clear plan, we’ll never know which are the most successful trades, and which are the ones we should steer clear of.
A trading plan won’t necessarily make your trading profitable, but it will give you the tools you need to become profitable, by allowing you to hone in on your best practices (and to ditch the worst).
Today I’d like to show you how you can build the basics of a trading plan. You can use this template as a starting point for any style of trading, any instrument, any timeframe – and it will help you to build and develop your trading towards a more profitable future…
Trading template: the trader
In the first part of the template, you’ll assess why you’re trading and what you want to achieve from your trading. It’s easy to give an off-the-cuff answer here, or to skip this step, but please give it some thought – many traders set out with unrealistic expectations of what can be achieved, setting themselves up for failure.
By taking a long hard look at what you want and how you plan to get it, you’ll dramatically increase your chances of success…
1• Why do you want to be a trader? Is it for the extra income, for the mental challenge, or a combination of things?
2• What is your trading style? Are you aggressive or cautious? Try to evaluate your strengths and weaknesses – this will allow you to play your strategy to your strengths and find ways to compensate for your natural weaknesses.
3• What is the right frame of mind for you to trade in? Tell yourself how you should be feeling while you trade – if you’re in a negative mindset, set the rules that will stop your trading for the day.
4• What is your target? What do you hope to achieve by the end of the year? By the end of the month? By the end of each day?
5• Which markets/instruments will you trade? Try to keep the list of markets you follow limited, adding to it gradually as your confidence and experience grows.
6• How much time will you devote to trading? What will be your “working hours”? And what timeframes will you follow? (This is what we covered last week)
7• What is your routine each day before you start trading? I’m talking about a to-do list when you sit down at your screen: analyse and log yesterday’s trades… review your open positions… assess market conditions… check for data releases… plan your day ahead…
Trading template: the bank
8• What is your general attitude to risk? Are you risk-averse? Or more gung-ho?
9• How much will you risk on an individual trade? And what is your maximum overall exposure to the market? (Say 1% per trade, and 5% overall risk at one time)
10• What success rate do you expect to achieve?
11• What is your risk-reward ratio?
12• When will you stop trading? Will you have a maximum daily target at which you’ll stop trading? Or a maximum daily loss? Or, for example, stipulate that if you hit your daily target, then take two losses, you’ll stop trading.
13• How will I deal with serious drawdowns? (They do happen!) At what point will I cease trading a strategy, and reevaluate its efficacy?
14• How large will I allow my trading account to become before withdrawing profits?
Trading template: Getting into and out of trades
15• What is my trade set-up? This is the exact criteria that will get you into a trade.
16• How will I find my trade set-ups? Am I scanning charts? If so, which charts and between which times? Am I using automated signals?
17• How will I exit a losing trade? What are the criteria for positioning my stop loss?
18• What are the criteria that set my profit target?
19• What set of events would cause me to close this trade before my stop loss or profit targets are hit? (I.e. some signal or data release that negates my entry criteria.)
Trading template: moving forward
Whether you’re trading profitably, or still trying to find your edge over the markets, traders must constantly be striving to keep ahead of the markets. The market is always changing its mood, and we have to be forever checking out adaptations, and be prepared to throw out things that simply aren’t working.
This is part of the process of evaluation…
20• What is my end of day routine? This involves recording the day’s trades, assessing performance and judging how we can improve our performance, both technically and psychologically.
While 20 steps may seem a little daunting, these simple pointers should make the whole process of trading less stressful, more disciplined – and a whole lot more successful.
In the next seven days…
Next week sees PMI reports released around the globe.
For the UK, we have construction data on Monday and services on Tuesday, alongside retail sales figures. Add to this, Thursday’s manufacturing production, and we can expect to see a bleak picture, and no suggestion that GDP will be bouncing back up anytime soon.
Thursday sees interest rate and asset purchase announcements from the Bank of England and the ECB – no changes are expected for either.
The main data from the US next week will be the trade balance on Friday. This is expected to have narrowed a little, but still shows that US exports are being held back by recession and slow-down in other markets.
And finally, don’t forget the non-farm payrolls out this afternoon