A Trading Plan - You MUST Have One!

This is a discussion on A Trading Plan - You MUST Have One! within the Home Trader forums, part of the Trading Career category; There are a lot of useful replies here, thanks for all the responses. I'm not going to reply to those ...

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Old Nov 22, 2004, 8:57pm   #31
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Thanks Everyone

timsk started this thread There are a lot of useful replies here, thanks for all the responses. I'm not going to reply to those of you who addressed your post to me in person as I'm anxious to de-personalise the thread. Moreover, in retrospect, I don't think it was helpful of me to start talking about myself and what I trade, when and why etc.

When I started the thread, the vision that I have in my mind's eye is that collectively we arrive at a document - 'The Trading Plan' - that newbies and seasoned pro's alike could use with minimal tweaking. I accept fully the drawback with such an approach is that the content may be diluted to appeal to the lowest common denominator but, even so, potentially it could be a valuable resource and a good starting point for those of us who would not otherwise have a clue where to begin. To use a cooking analogy, - say baking a loaf of bread, we want a basic recipe that everyone can use regardless of their baking experience. At the moment, we have quite a variety of different ideas on the subject (as is to be expected) which range from the 'macro' (basic ingredients: flour, water, yeast etc.) down to the 'micro' (. . .'a tiny extra pinch of salt is what makes the perfect loaf for me'). Whilst such disparate contributions are all valid, they are nonetheless somewhat confusing! How does someone without a trading plan make sense of all of this?

The solution that I propose is this. I will attempt to pull together the various strands of the thread into just such a document. I'll do it in Word and call it Trading Plan - 1st draft. This will provide the thread with focus and enable people to post their observations. Things like what's been omitted, what's not clear and how it could be improved etc. With this feed back I can then update the document and put forward a 2nd draft for members' consideration. Ultimately, between us, we will create a template which will enable all traders to produce their very own Trading Plan which is 'detailed, specific, tested and profitable'. It will take me a while to produce the first draft; in the meantime, any feedback on this suggestion would be most welcome.

One last thing, I apologise in advance to those of you that I will upset because I appear to have ignored your contribution. I hate offending people, but I fear that in an exercise such as this, that it is almost inevitable. Sorry!

Tim.
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Old Nov 22, 2004, 10:39pm   #32
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Hereís some stuff I am researching at the moment. Hope it helps?

After 4 months of research, some stuff I think I have learnt.

Where the research derived from.
T2W : Invaluable if you can cut the wheat from the chaff. (Not saying I can)
Books: what I liked the most. (Mostly recommended by the top guys on this site, you know who you are but thanks again.) Training courses.

I make no apologies for the below being from a book or what members have said on these boards just take it as a compliment. If you donít see something you said please donít be annoyed I am probably still working on it.

Copywrite issues: my own words are below and just some stuff I have remembered anything that sounds the same is pure coincidence.

The trading plan has as we know multiple parts and I do not think it can be stressed how:

A, important it isÖ.donít trade until you have one and it has been tested and then if test ok, small amounts to begin with in live markets as the physiological aspects of trading with real money will play merry hell with the most robust trading plan.

B, Keep it simple. If it is to complicated you may find it will cause too many problems and lead to diverting from the plan.

C, Think small, not BIG (little acorns and all that)

D, Give the plan a chance to work (say 20 trades at a time) and then reassess how it is doing. Obviously keep assessing even a winning plan as markets I believe do change from time to time.

E, be patient (can not tell you how many people on T2W have given me and others that great advice)

F, Learn how to place an order/trade, with all your stops-limits whatever in place before you enter the trade. What is a limit order? What is stop loss order? Must learn before you trade. The trade should be made without fear or worry.

Example (not mine but one I am researching)

1, the trade entry must be precise. Harder said than done, I think. (I am struggling with this one, but persevering to find one that suits)

2, Learn to take what the markets gives you a small profit is better than a loss.
I am practising scaling out on paper and quite like this idea. Any views would be great. I also agree learning to take profits may be one of the hardest lessons to learn.

3, except fully that your trade is going to cost you money (business expense) to find out if you are right at that moment in time. Make sure your stops allow you to go onto the next trade to find out if the next trade is right.
I.e.: if you accept that each of your 20 trades could cost you £100 pounds/$ with each trade you make at a loss, that would cost you £2,000 pounds ( 20x £100=£2,000) if every trade went against you.
The idea (not mine, I wish) that you will be wrong 20 times in a row is unlikely as is being right 20 times in a row. Truth is you donít even need to be right 10 times. You donít even need to be right 8 times if you scaled out a bit and took some profits when they presented themselves.

Keep it simple!!!!!!!

I stop rambling on now, sorry if I have bored you.

None of the stuff above is mine just things that interested me in my research. Still trying to put it all together.
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Old Nov 23, 2004, 12:36am   #33
Joined Aug 2004
When writing a plan, I found the information Man Financial Site (someone offered the link earlier on this thread) useful along with some useful information from Investopedia:
http://www.investopedia.com/articles.../04/042104.asp

What have I got on my plan?

- What I trade
- Why I choose this market
- What trading vehicle do I use and why
- What are my money management rules
- What are my profit objectives, and when will I change them
- What set ups do I look for
- What are my entry rules
- How do I manage and exit my trade
- What do i do before trading (ie before market opens or before you trade when you come home from work)
- What do I do after the market has closed.
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Old Nov 23, 2004, 10:05am   #34
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dbphoenix' post on the original thread read. . ."I rarely find beginners who have trading plans. And by "trading plan", I mean something that's detailed, specific, tested, and profitable. Instead, they have what is at best a collection of ideas that seem good and which they try out, often with real money, in order to see what happens. This is not a plan."

My views on trading plans are......

- A plan is a very good and essential but it doesn't have to be written down and shouldn't constrain.
- Having a plan doesn't turn an unprofitable trader into a profitable one (but it may help some).
- Every trader is different so what suits one ( a written plan & whats in it) may not suit another.
- A beginner cannot have a trading plan as described above. This is because if the plan they write contains 'tested and profitable' trading plans I wouldn't describe them as a beginner. To have got that far they would have quite a lot of knowledge and experience.

A question.....

How much like a business plan should a trading plan be? e.g. Should it include a section on your 'niche' and area of expertise v. the competition or doesn't that matter if you've got a profitable method.
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Old Nov 23, 2004, 10:46am   #35
 
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As with anything in life everyone will have different views as to what a trading plan should consist of, my view in light of phrases like "plan the trade, and trade the plan" etc, is that a trading plan should at its heart contain a framework to enable the individual to enter, manage and exit a trade, profitable or not. Nothing more.
Consequently when I look at a particular stock that has come up on my screen I often have planned the trade before I even decided if the trade is viable or not. Such is its simplicity.
But ultimately whatever you decide to adopt as a trading plan you must be comfortable with it, after that the market will tell you if it is a good plan or not.
As for dbphoenix's post, I suspect he was referring to paper trading a plan befor you commit cash and there by it will have been to a degree tried and tested, as long as you are honest with your paper trades.
Appologies dbp if I have mis-interpreted
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Old Nov 24, 2004, 3:45pm   #36
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Quote:
Originally Posted by Tuffty
- A plan is a very good and essential but it doesn't have to be written down and shouldn't constrain.
If I understand your use of the word "constrain" properly, I think the whole idea of a "plan" is to constrain, or limit your actions at any given time.

Without the limitation's, you'er likely to run amok with your trading.
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Old Nov 24, 2004, 4:49pm   #37
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sulong, I guess it depends on your motivation for defining a trading plan. It should be OK to change it for the right reasons (i.e. new information changing the parameters of a trade) but wrong if you want to change the plan based on hope, greed or dispair.
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Old Nov 24, 2004, 5:00pm   #38
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Very useful thread for us beginners out here.

I was going to ask about system testing - how should this be handled in a trading plan, if at all - but then I realise that is all depends on one basic question: Should one person have one overall trading plan, or can/should there be one for each type of trading?

From reading all the above, it seems to suggest that one plan per person.

If this is true - and Tuffty hit the nail on the head - where does a beginner begin?

Jyde
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Old Nov 24, 2004, 5:35pm   #39
 
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Jyde,
Again there are likely many different ideas as to what constitutes a biginner and there fore a difficult question to answer, but to take itright from the beginning..........
In my humble opinion you start with yourself. Ask yourself the following questions.
Why do I want to trade?
What would be my goals from trading?
What aspects of trading interest me?
How much time do I want to devote to trading?
How much money do I have to devote to trading?

Having answered those questions, then you have a direction,be it stocks futures, currency.
From there you want to read as much as you can surrounding the area you want to concentrate on. Observe the movements of the chosen vehivle you wish to trade,by watching you will naturally begin to develop theories as to what you expect to happen based on what you have learned. By paper trsading these theories you will get an idea if you are on the right track.
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Old Nov 24, 2004, 5:55pm   #40
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Jyde, I think you have to go ahead with what suits you. Good advice from rougue trader. I have a difference of opinion on paper trading. I'd argue it doesn't get you very far up the learning curve. Much better to use real money then you can feel real emotions when trading. One can read all the theory about how to ski and pretend to do it in your lounge but it doesn't get you very far when you do it for real. Obviously one would choose a gentle slope first (i.e. very small fraction of your trading money) so when you fall over (loose the lot) it doen't hurt too much but the lesson is learnt (i.e. use and apply a stop loss).
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Old Nov 24, 2004, 7:50pm   #41
 
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I'd agree Tuffty, when it comes down to it paper trading is a long way from "live trading" and I'd even go as far to say that you could quite successfully paper trade and fail completely trading for real, but it does have its uses, providing you are honest with yourself. Even though I trade for real now, I still paper trade any new setup before taking it live.
I would certainly never risk my capital before successfully paper trading for a while. Though when it came to live trading I approach very cautiously regardless of the results on paper. The market seems to have a way of knowing when you have real money at risk
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Old Nov 24, 2004, 8:38pm   #42
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Thanks, both Rogue and Tuffty.

I can only agree with all your sentiments, as they are of course very sensible and the only way to approach this from any sensible angle (albeit, not all do consequently, including myself in past times).

I have been trading for almost a year (I am breaking even, lately catching up with initial losses), so I am actually past the initial stages of trading. Also, I use very small amounts until I can show a consistant trend of gains.
I just happen to be caught in a strange position of being between 'ideas'. I think I would post more details and ask for advice in seperate thread, though, rather than destract from this splendid thread we have here.

What I was more enticed about regarding the subject of writing up a good trading plan was that noone seems to include testing in their suggestions here, which puzzled me a bit, and I was wondering whether this was down to individualism, purposefully done, or simple forgetfulness (not that I believe that for a second, of course).
I would have thought something along the lines of:
For new systems/strategies, I shall paper trade for a minimum of 20 units of the time frame of relevance, and backtest shall show an average risk/reward ration of 1:3 for at least... etc, and so on...

Is it simply because, as we say in my native country, to keep beard and snot seperate, ie. is a trading plan only really considere once a strategy has proven succesful?

Jyde
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Old Nov 24, 2004, 8:45pm   #43
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Quote:
Originally Posted by Tuffty
sulong, I guess it depends on your motivation for defining a trading plan. It should be OK to change it for the right reasons (i.e. new information changing the parameters of a trade) but wrong if you want to change the plan based on hope, greed or dispair.
It looks like I did misunderstand your use of the word "constrain".

I agree that a trader needs to "update" his plan from time to time.

But, once it's updated, the plan needs to be followed exactly, until the next update

Otherwise, it's not a plan, but an idea..
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Old Nov 24, 2004, 9:22pm   #44
 
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Hi Jyde,
Now that I know where you are in trading there is probably very little advice I can give you, more just a case of sharing ideas and experiences. I can only truly say I have been trading for about a year also, during that time I have learnt that what I was doing before bore little resemblance to trading but proved quite costly so it will be a while before I recover the money lost in those 18 mnths or so.

For me personally a plan is simply a road map for a particular trade ie an entry point, a management phase and an exit so testing wouldn't come into it. For me trading is a bit like a war, (an analagy I picked up in a trading book somewhere and adopted) So on that trainof thought testing, in my case paper trading a theory is a bit removed from the front lines of the battle as it were so it doesn't get a mention in either my strategy or plan. It comes before both of them and if it passes the test will be incorporated into my strategy. If that makes any sense.
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Old Dec 12, 2004, 12:53pm   #45
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Update

timsk started this thread
In an earlier post I foolishly offered to collate the views expressed on this thread and try to cobble together a basic trading plan template. It's proving to be a tad more complicated than I imagined it would be, but I suspect you lot all realised that didn't you!
Anyway, I am doing it and I will post it for everyones amusement in due course. However, (insert an excuse of your choice here - Christmas etc.) it's not going to happen until the New Year I'm afraid. Nonetheless, I'm sure that won't be a problem because, as disciplined traders, you all share the same middle name, Patience!
Seasons Greetings to you all.
Tim.
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