“One day I will do this, but right now I just want to trade.”
“Seriously, I don’t have the time to write a trading plan, I’ve got better things I can be doing, like trading”.
“I know how to trade, I have all the information in my head and it will take too much time and effort to have to type it all up.”
“A trading plan? This is not like business so I don’t need one.”
These are some of the excuses that the 80% of traders who FAIL in the markets say to themselves to justify why they don’t need to write a trading plan.
The statistic is that only 5% of traders earn the biggest profit in trading and they will all tell you that their secret weapon is their trading plan and how important it is to develop a trading plan. Yes, those who are highly successful in the markets are always emphasising that your edge is a trading plan.
Developing a trading plan is becoming like a redundant mantra. But even with the statistics, there are still a lot of traders and investors who venture right into their business of trading without thinking of the significance in getting organised through a trading plan.
Believe me when I say that this is one of the most crucial aspects of a successful trading business. If you are in this for the long haul, you need to have your plan documented and you will be surprised by how much clarity you gain from just doing it.
Over time the details of your trading plan will evolve – they are dynamic and will evolve as you grow as a trader. It is important that as you encounter various experiences in the market, you also evaluate and amend your trading where needed.
The most important thing is to actually give yourself the time to start writing and developing it right now, preferably before you start trading. If you are already trading, then stop and take the time to now develop it.
| So, What does a Trading Plan look like? |
A trading plan will be personal to you. Each person is individual and has a different risk profile and temperament. Your plan should cater to how you want your trading to look like. It should also suit your lifestyle and your personality.
At times trading can feel like a giant roller-coaster ride. Traders who survive and prosper are the ones who are prepared for these ups and downs. When something happens in the market that they did not expect, they already know how they will react to protect their account as they have it all documented in their trading plan.
I am so passionate about helping traders to write a trading plan that I have written a book on this topic, called “Smart Trading Plans” (Money Magazine has listed it as one of the top 10 best-selling finance books). I also have a mentor course in which I share my personal trading plan and help guide traders in being prepared for all situations in the markets.
Below are some of the important aspects you can include in your trading plan:
• goals and objectives – this is where you need to ask yourself significant questions like why do you want to trade, what your trading edge is and the returns you would like to achieve in the market. When things become unclear or you hit that cluster of losses, the goals and objectives will keep you afloat and motivated.
• trading structure – determining your trading structure is beneficial for tax purposes and asset protection. You have a selection that ranges from trading in your personal name (which may be how you start), through a self managed superannuation fund, or setting up a trust or company.
• trading tools – there are a hundred and one different resources that are easily available to you as a trader – from computers, charting software, data providers, sources of information to websites, brokers, and more. If you key in the word trading tools in an internet search engine, you will have 87,200,000 accessible and related searches you can click in a second. You can easily get bogged down by these. You need to choose trading tools that work for you best and include these in your trading plan.
• trading style – choose the timeframe in which you plan to trade — short-term trading, medium-term trading or long-term trading. Make sure this time frame fits into your lifestyle and suits your personality.
• trading instruments – online trading has created a vast range of different instruments as well as provide access to global markets. You need to choose the kind of instrument(s) you want to trade and the markets where you want to trade these instruments. You can choose from shares, CFDs, options, warrants, foreign exchange, futures, indices, etc. Just make sure the instrument and market you choose suits your chosen trading style.
• trading indicators – there are hundreds of different trading indicators that you can use in selecting a good trade. Keep a simple approach and concentrate on a small selection of trading indicators. If you use fundamentals you may choose to look at PE ratios and dividend yields. If you use technical analysis to make your trading decisions then you may choose a range of indicators to use on your charts, such as moving averages, ATRs, RSI, Stochastic and the list goes on and on. It is very easy to get bogged down with too many indicators, it’s important to not over complicate your trading this way.
• money and risk management – one of the keys to a trader’s success in the markets. You need to include information in your plan on how you will determine your position size, how you will allocate your capital in the market, how you will pyramid and add to winning trades and what stop-loss methods you will use. Your goal as a trader is to minimise losses and keep them small and let your profits run and keep them larger. You cannot control the markets or determine how far a stock will rise or fall and when it will happen. The only control you have is how you manage your risk in the market. It can take just one trade to wipe out your entire profit for the year or possibly more if you fail to use a stop loss on a trade. Strict money management rules must be adhered and are a very important part of a trading plan, that new traders sometimes overlook.
• trading system(s) – you need to determine your criteria as to when you will enter a trade and how you will exit a trade, and this forms your trading system strategy. You may have more than one system, just like I have a long-term trend following system and a medium term daily swing trading system. They have different trading rules and I have them detailed in my trading plan.
• trading routine – as a trader what will you do on a daily, weekly and monthly basis in the markets. Trading as with any business is all about having a routine that you follow. So you need to consider when you will place your trades, when you will update your stop losses, how you will track and manage your trading, when you will view or download market data, how often you will evaluate your trading statistics, etc.
• market exposure guidelines – what will you do during a bull market vs a bear market? Will you trade differently and change your methods during certain market times. Or what if you hit a cluster of losses, will you tone things back? These are just some of the things you need to consider in your trading plan. As there may be times when you will stop trading under certain market conditions.
• Contingency plan – you need to plan for all worst case scenarios of what could go wrong in your business of trading and how you will handle these situations. For instance, what is your back-up plan or strategy for difficulties like bad internet connections, power outages, market crash and more?
| Become a SMART Trader |
You want to be a SMART trader and create a trading plan that reflects the following key criteria, which is an essential part of my SMART philosophy in trading. This is what I mean by SMART:
Simple: Remember to keep your plan simple – it is easy to get bogged down with too much information in trading and overcomplicate it with too many rules.
Mindset: It is what goes on inside your head that will make or break you as a trader because you are the most important part of your trading. You need to constantly work on yourself as a trader, just like a top athlete works on themselves to become a peak performer in their field.
Approach that suits your personality: Trading is about developing an approach that you are comfortable with that suits your personality and lifestyle. You can make trading as stressful as you want it to be and trade 24 hours a day or of an evening when you get home from work – but would this suit your lifestyle. You do need to be realistic in your approach.
Risk and money management: Managing your risk and money will be one of the keys to your success in the markets. You need to include information in your plan on how you will determine your position size, your capital allocation and stop loss methods.
Trading system: Your system will include the signals you will use to enter a trade, such as the set-up and trigger criteria and, most importantly, your exits.
| What is crucial about developing a trading plan? |
Trading is very challenging and you will learn alot about yourself as a trading. It is those traders that plan ahead that have the higher chance of success. That is because they took the time and effort to develop their personal trading plan.
A trading plan will provide you with clarity and focus as you have taken the time to answer all the questions of how you will enter, exit and manage their business of trading. It is your road map in the market – without it you will get lost.
Buy your copy of Smart Trading Plans now and get the FREE trading plan template that you can complete as you work through the book.
Copyright Smart Trading 2016
Want to use this article in your e-zine, website or publication? You certainly can. Please ensure it remains complete and unaltered and include the below author information with it:
About the Author
Best selling author of “Smart Trading Plans”, Justine Pollard is a successful private Australian stock market and CFD trader, experienced trading educator and sought after trading mentor. Justine specialises in supporting traders to become peak performers in the market.
Justine has been interviewed in many trading books, media articles and been featured in Sky News and recently interviewed by Trading Story Podcast.
If you are looking to start trading or have been struggling in the markets then you can find out more about Justine’s Ultimate Smart Trading Mentor course from her website. Go online now and you can download Justine’s FREE special report – ‘10 Key Mistakes New Traders Make’ – www.smarttrading.com.au