A trading plan is essentially a tool that you can use to clearly define your trading objectives and your trading system, stating out all the important trading elements to help you in effectively carrying out a trade successfully. Let us begin.
Your Trading Objectives could be anything that suits your needs, perhaps to stick closely to your trade parameters, or to remind yourself that you will only trade when you can give full attention to to market etc. Here's a list of suggestions perhaps you may find them useful:
* Avoid emotion-based trading.
* Increase winning trades as % of total trades & increase size of winners with respect to losing trades.
* To achieve minimum X% capital growth per annum.
* Etc, etc, etc.
As you probably know by now, Trading Objectives will most likely to be unique to each individual personality and ambitions, and will vary from person to person.
Once you have your Trading Objectives in place, next step will be to put together a trading plan. Many of you probably doing it subconciously, but detailing it out will probably help in your trade plan.
Fig.1 Elements of a Trade Plan
Source: Traders .com
What rules and parameters am I defining for my trade entries?
How much lost (% or dollar value) am I willing to take for each trade, and the corresponding position sizing?
What's my trading time frame?
What's my trailing stop and exit plan?
The rules and parameters will be your trading edge, something that you come up with that you feel it suits your approach towards the market. It is essentially a technique that put you in an advantage over other market participants, and give you a higher probability of success in your trade.
Here's a 'checklist' on the components of a well thought out trading plan:
* It has to be rationale.
* Aligned with your belief, character and approach towards the market.
* Has a well defined 'exit' level when the trade is invalidated.
* Instrument / Market Assessment.
* Entry Price and Position Sizing.
* Exit Plan (both cutloss level and profit target [for some people]).
In its essence, a good trading plan can be possibly be ranging from very complex down right very simple, depending on the trade system and the individual trader. With a proper trading edge, one has to have the understanding that each trade is independent of the previous trade and also to look for ways to continually improve the trading edge.
Here are some pointers with regard to carrying out a trading plan. First and foremost, be patient. There are times when your gun powder should remain dry (ie. your money should be idle, waiting on the sidelines). The best traders and investors know that good trades or investment opportunities will come to them, if one is patient. Once the opportunity comes, you have to make a decision to make the move (i.e. Pull the trigger, so to speak).
Position Sizing: The size of the position, from a trading perspective, should usually be consistent, that way, you could control and manage your risk much better. However, as for the very experienced trader or investor, when a great opportunity arise, he could then override his rules and put on a bigger position, and of course this might take years of experience and practice to improve the chance of success, while still be very mindful of the potential risk. As a matter of fact, the ability to scale at the right time is an useful and important edge that you might want to develope and built into your system as your experience grow.
Experience traders know that trade has be be made based on facts and independent decision and not from the opinions of others. Before a trade is initiated, from a trading perspective, one must already pre-define the risk of the trade, and attempt to enter the trade at the optimal 'entry zone', once if ideal entry price range moves away from you, let the trade pass and move on to the next trade, have the attitude of 'so what', knowing that, with certainty, that there will always be the next trade opportunity.
“The beginning is the most important part of the work.”
Once a trade is initiated, especially at the beginning of the trade, one has to be mindful of the stoploss and watch the trade carefully, 'praying' (so to speak, though we have to be mindful not to get emotional in trading) that the trade will not be stopped out. The stop should not be placed too close such that it will easily get hit nor should it be placed too far such that being stopped out would mean a large draw down to your trade capital. If / when a stop is hit, my preference is to gracefully closed out my position and move on. It could sometimes be painful and or unexpected (if it is expected, who would take on a trade?), but, moving on to look at what's next in a calm and collected manner is usually the best course of action.
As soon as the trade moves in your favor, it is when you start to set trailing stop. Depending on your trading time frame, your trailing stop can be set tight or 'loose' to allow whipsaw movements. In general, if one wants to ride the trade for a short term trade (ie. Trading of momentum or events), the trailing stop can be set tight. Conversely, if the trading time frame is more mid to longer term, the trailing stop has to be set far enough so that it allow some pull backs as the stock resume the up moves. Once the profit hits your profit target, you can start to keep moving your trailing stop upwards, with one important rule in mind, the trailing stop can only move up and never move down, to serve its purpose well. This useful Youtube video (about 8 mins) on "How to use Trailing Stop-loss?" will give you a good visual understanding of what I am attempting to explain above.
Now that we have covered the elements of a Trade Plan, its time to put it to good use. Remember, the above just simply provide a general guideline, and you and only you, will be the key to conceptualize and translate the ideas into workable trade plan for your very own trade or investment plan.
Enjoy the journey.