how to build a trading plan note: this is not intended to produce a complete trading plan. this is...

How to build a trading Plan

NOTE: This is not intended to produce a complete trading plan . This is all about the thought process one has to go through and the steps required to build a complete trading plan

1Copyright 2007, TradingOurWay, Prepared by Kermit Prather

Simple is best - starter ideas• Limit trades to only a few open positions to start• Limit your losses to small amounts• Use trailing stops on your profitable trades• Check, Track and update your positions every day. • Close out the losers – never let a loser run• Only take trades with a greater than 2 :1 Reward to

Risk Ratio when trading Equities • Follow your rules and don’t let emotion and greed

creep into your trading

Copyright 2007, TradingOurWay, Prepared by Kermit Prather 2

How to build a Trading Plan

• Before we begin let’s have a discussion on what is required to create a Trading Plan• Goals - must be specific • Measurable – must be able to measure

your performance against the goals• Achievable – Goals should be

reasonable and achievable. You need believe you can achieve the goal for you to succeed


How to build a Trading Plan

• Relevant – Your goal must be important to you so you will be driven to accomplish them

• Timeline – You have to set a completion date for each goal, such that you are focused on its completion


Trading plan content (sections)

• Overview This section should address the why and what

• ADMINISTRATION This section should address the setup, and day-to-

day operation of the record keeping and performance of your trading.



• SELF ANALYSIS This is the really tough section, as it requires you to

assess yourself. You must be honest in the section even if it hurts. Hopefully. You will learn something that need to be improved or changed in how you approach trading.

• TRAINING This section should cover your on-going education

and how you plan to improve it.



• TRADING RULES– Generalized Rules – which apply to all situations. – Strategy dependent rules

• MONEY MANAGEMENT– also known as Risk Management – how much you

willing to risk losing on each trade– Position size – how many shares per trade



• TRADING METHODOLOGIES– Long, Short, stocks, options, spreads– Trading strategies you will employ

• Tools – Software• Charting• Trading• Tracking


Plan Overview Section

• Why do you want to trade?• What is it you will be trading; stocks, bonds,

options or futures?• Do you have a trading partner? – With whom you can exchange ideas and opinions– We all need help and someone to assist us– We all need a sounding board– At one point or another we all need a mentor


SELF ANALYSIS

• What type of trader do you expect to be?– Daytrader– Swing trader (3 – 10 days) – Intermediate trader (10 - 30 days) – Long-term

• What is your tolerance level for losing?• So you get attached to your open positions?• How much you are willing to risk. In dollars or

percentage?


SELF ANALYSIS

• What is your experience level?• How much trading have you done?• What must you do to make it possible to

achieve your goals? • Are you sure you are emotionally, physically

and mentally ready to trade? • How will you eliminate distractions?


TRAINING

• Develop an educational plan• What trading books have you read? • Develop a reading list, set reading goals, watch

online videos.• Attend free and fee seminars• Join trading group such as the yahoo and

google groups


MONEY MANAGEMENT

• What percentage of your capital are you willing to invest in each trade?

• What percentage of your capital are you willing to risk?

• What position size (# shares) will you be trading? How will you control the size?

• What will determine a change in the position size traded?

• How many open positions will you maintain?


ADMINISTRATION/TRADE MANAGEMENT

• How will the account be funded? • How much do you have to invest? • What type of account will I trade? IRA,

Margin? • How will you pick your broker? • What is your expected Return on

Investments?


ADMINISTRATION/TRADE MANAGEMENT

• What will you use for a trading diary or journal? • How do you plan to review your open positions? • Do you plan to do a post mortem or all your

completed trades? – If so, how and what do you look for?

• How will you measure your performance to determine you are meeting your objective?

• What factors will be used to a halt or take "time out" from trading?


TRADING METHODOLOGIES/SYSTEM

• What trading strategies will you employ? • Are you trying to use other peoples trading

systems? – Have you adjusted it to your style?


TRADING METHODOLOGIES/SYSTEM

• Plan your trade by knowing the answer to each of these questions:– What are the setup conditions of your strategy? – What are the entry criteria? – What are the exit criteria?

• What type of order will you use to execute the trade?

• Remember cash is also a position.


TRADING RULES

• There are general rules that apply to all trading and rules specific to a strategy– General Rules1. No matter the source of the candidate, I and I alone am responsible for

making the trade profitable. I get all of the blame, but only some of the credit2. Never trade without doing Due Diligence. Never trust anyone’s “hot” pick

Investigate it, and then trade it only if it fits your style3. Plan your trades. Trade your plan4. Never trade stocks 3 weeks before earnings announcement5. If after 3 days the trade has not moved in the expected direction, get out6. Always know the Entry, Worse Case Exit and Target prices before trading7. One of the keys to successful trading is knowing, yourself and your stress point


GENERAL TRADING RULES (cont.)

8. The difference between winners and losers isn't so much native ability as it is discipline exercised in avoiding mistakes.

9. The most difficult task in speculation is not prediction but self-control. Successful trading is difficult and frustrating. You are the most important element in the equation for success.

10. Always discipline yourself by following a pre-determined set of rules.11. Speech may be silver but silence is golden. Traders with the golden touch do not talk

about their success. 12. Dream big dreams and think tall. Very few people set goals too high. A man becomes

what he thinks about all day long. 13. Keep records of your trading results. Trading journal is a MUST14. Stay positive, no matter how much you lose 15. Forget your College degree and “Trust” your trading skills16. Buy into bad news and sell good news17. Buy high and sell higher


GENERAL TRADING RULES(Cont.)

18. Continually strive for patience, perseverance, determination, and rational action. 19. Limit your losses - use stops! 20. Never cancel a stop loss order after you have placed it! 21. Place the stop at the time you make your trade. 22. Never get into the market because you are anxious because of waiting. 23. Don’t over trade. Avoid getting in or out of the market too often. 24. Remember that a bear market will give back in one month what a bull market has taken

three months to build. 25. Don't ever allow a big winning trade to turn into a loser. Stop yourself out if the market

moves against you 20% from your peak profit point. 26. Accept failure as a step towards victory. 27. Have you taken a loss? Forget it quickly. Have you taken a profit? Forget it even quicker!28. Expect and accept losses gracefully. Those who brood over losses always miss the next

opportunity, which more than likely will be profitable.


how to build a trading plan note: this is not intended to produce a complete trading plan. this is...

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