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Trading Plan - part 1

Trading Plan – May 2009


Why I want to be a trader?
I want to be a trader because:
1.I want to be responsible for how much money I make and lose. I want my salary to be a direct reflection of my effort and ability.
2. I want to know more about myself and improve myself. Being successful at trading means successfully knowing myself and continually analysing and improving myself. Trading results are a direct measurement of my progress.
3. I enjoy the challenge of being in the small minority of people who succeed.
4.The financial possibilities are limitless.
5.My dream is to travel and experience the world. Therefore, I need the freedom to work when I want, where I want.
6.I enjoy it.
7.I'm interested in the markets and I enjoy reading about the fundamentals.


Outline
I'm a discretionary trader. My style is mildly conservative and I don't want to sit in front of a screen all day picking off fluctuations. I believe the real gains are in the longer term price moves, so I'll trade primarily from the weeklies and dailies.

However, while I'm pleased with the progress of my patience, if I just trade weeklies/dailies there's too much temptation for me to force trades that I shouldn't make. So, I'll drop to dailies/hourlies when there are no trades in the longer time frames.

Ultimately, I want to trade the US markets because that's where everything happens. The rest of the world just follows what happened there yesterday. But the time difference makes it impossible for me to trade hourlies, so I will only trade the S&P 500 ETF (eventually I'd like to trade with spreadbetting, but at the moment the margin requirement is too big for my trades) on the weeklies/dailies and I will trade FX from weekly to hourly. I'll only trade the major pairings involving GBP and JPY, and EUR/USD, because they interest me the most.

My edge is my trading system. Based on backtesting and forward testing on several markets in several periods of time, it provides a break even or profitable trade 63% of the time, with an average return of 1.43% per trade. If I follow my system I will make money.

My biggest weakness is my mind. I need to train myself to trade with confidence and objectivity, and without hesitation, fear, greed or hope.

I will only trade when I'm mentally fresh. When I backtested feeling tired I lost much more often than I won. If I'm tired I'll do menial tasks, i.e update my journal, study, or walk away and do something to freshen my mind.

My financial targets are simple: to have an upward sloping equity curve. I can't say I'll make x amount each week because I might not; I don't know what the markets will do and I don't want to put extra pressure on myself – it will increase my chances of chasing trades that aren't there. But within a year I'd like to be making an average of over £1000 a month. Then I can quit my full-time job.


Equipment
eSignal for analysis because I can pay for end of day data and also have the option of using 15min delayed intra-day data for use with hourlies. They have a good reputation and personally recommended to me by a pro. I can also analyse FX and US stocks with one piece of software. They are reasonably priced and have a 30-day free trial.

FXCM for FX trading because they have a good reputation, they are personally recommended by a pro, they are compatible with eSignal, they have tight spreads, mini 10k lots – allowing to trade small, and I've used their demo account.

TD Waterhouse for stocks because they are the cheapest for international stocks, and they've been very reliable so far.

When I move up to Spreadbetting, IG Index because they have the tightest spreads, lowest margin requirements, an easy to use platform, a good reputation among pros, and I tried a few other recommended sites and didn't like their platform/product.


Trading Routine
Before the (European and US) market opens I'll read the financial news and catch up with the overnight markets, and check my economic calendar for any upcoming events. Then I'll check my open positions; moving up stops/moving down exit targets if necessary. Make sure all previous trades have been logged in my spreadsheet and added to my trading journal. My trading journal will include my thoughts and emotions about each trade at entry and exit, and my overall conclusion.

After that I'll run through my daily action plan: checking the technicals for each market on my list and rating them A (likely trade today), B (possible trade this week), C (unlikely trade this week), putting a comment in brackets next to it if it's an hourly trade. If it's an A or B I'll also insert a note next to it describing the technicals and why it's a trade/why I should wait.

Execute any trades ready to be placed.

After I've updated my action plan, executed any ready trades, and updated my spreadsheet and journal I will use my time in the following ways:

1)Do some exercise to clear my head
2)Work on tweaking my system – need to develop a simultaneous system for dealing with runaway prices, e.g Impulse System
3)Study
4)Read financial news or T2W website

I will also make sure I get out of the house, as 1 – 4 can all be done anywhere.

Every weekend I will make sure my spreadsheet, journal and equity curve is updated, and keep up to date with the news. And review my journal – did I execute my trades according to my plan? If not, why not? Which trades worked well and which didn't? Why/why not? Could I have extracted more profit? Could I have reduced my loss?





Risk Management
After suffering some serious losses in the past, and being a relative beginner, I'm risk averse. The amount of risk I can completely accept emotionally per trade is a maximum of 1% of my trading account. My total exposure to all open positions will not exceed 5% of my trading account. If the stop on a trade has been moved above the break even point, that trade is deemed to have no risk.

If my losses for the month reach 5% of my account I will stop trading for the rest of the month. The following month I will reduce my trade sizes to 0.5% of my account. If this happens for 3 months in a row I will stop trading completely for 1 month and paper trade and analyse my system and myself.

If I suffer a large drawdown to my account I will only add extra funds after I have done the above and I have started to make money again using small trades.

If, after several months, my equity curve is sloping upwards and I'm sticking to my system well, I'll increase my trade sizes. But still not more than 1% of my account.


Specific Money Management

Everytime I enter a trade I will place a stop order at the same time I execute the order. I can only move stop orders in the direction of the trade; never further away from the entry price.

I'll move the stop to a break even point as soon as the price moves to a point where it looks like it won't hit the stop through general market noise. If the price continues to move in my favour I will continue to raise the stop – always being careful to keep it out of the way of meaningless noise.

If the technical signals deteriorate and the trade no longer fits my system I will close the position early.



Trading System
Trade in direction of weekly trend, except for strong MACD div – in which case, enter slow (wait for base to form on weekly and expect at least 2minor peaks on daily, but USUALLY not more than 3), exit when technicals show serious signs of deteriorating on weekly. In faster trends look for entry when price reaches 12-EMA.

Enter when daily technicals reinforce weekly. Enter when prices close to value on daily. Enter long, ideally, when Force has ticked down (unless overidden by kangaroo tail) and MACD has ticked up. But just MACD up (Force just ticked up and MACD looks like it's about to tick up) is ok if price at value. Opposite for short. Must be at least 2 signals supporting decision.

After initial trade based on weekly, trade from dailies until technicals deteriorate. When 2nd trade (or 1st if missed the first chance) of a trend reaches exit point, don't sell; hold until trend deteriorates. Use next entry point to start short term trades. Don't be hasty moving stop to breakeven on long term trade.

In flat trends: wait for key breakouts – when price goes above/below rectangle on weekly check daily. When price breaks decisively (supported by spike in force or gaps with supporting technicals), enter after Force pulls back.

Holding length: indefinite, as long as technicals look good. Exit: Move stop to breakeven after price is clear of whipsaw level. Aim for channel limits, but be cautious around support levels – exit half if technicals/strength not strong. If move is strong exit half at channel limit and follow with fairly tight stop loss – careful not to get whipsawed out. Exit when force is in direction of trade.

DON'T TRADE AGAINST BIG MACD/FORCE DIVERGENCES.
 
Trading Plan - part 2

Advice

Plan the trade - trade the plan

Keep it simple: Trade what you see – not what you think

Maintain discipline

Keep excellent records

A rising tide floats all boats (buy and hold in strong trend)

Never try to catch a falling piano

Always use a combination of investing and trading strategies. Many people miss the best recoveries after big falls because they are out of the market altogether.

As technicians have known for decades, and as I have mentioned for decades, at important bottoms the market often violates the support level in question without setting off a downside cascade. A commonly allowed penetration is 5%. This is guesswork of course.

3 Trading Losses: Let's look at this from a purely statistical perspective.

(a) Win% = 60%; Probability of seeing at least 3 consecutive losing trades within a 50-trade period = 95.8%
(b) Win% = 70%; Probability of seeing at least 3 consecutive losing trades within a 50-trade period = 73.1%
 
Hi
I find your posting extremely valuable. I will certainly study it carefully and will adopt much of your advice.

Thanks once again for sharing it.
Kind regards and best wishes
Henry
 
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