By Cliff Clark
Does everybody have a trading plan? Does everybody really need a trading plan? I would say yes, everybody really really needs a trading plan, unless you are one of the few with a photographic memory that can remember every last thing you read. Do you know what a trading plan is and why you need one? Let's find out.
First, what is trading? Trading is an exercise in finding high probability setups and entering them with a target and exit in mind. But how do you know when a good setup arises and how to play it? That is where your trading plan comes in. Your trading plan defines your approach to each type of setup, it includes your entry and exit parameter's as well as your risk management. It will tell you when a good setup arises.
Once you have written and tested your trading plan it's simply a matter of developing the discipline and patience to follow it. That's the easy part right? <he says with an evil chuckle>
Basically a trading plan documents your approach to the markets. It should include everything that you trade stocks, options, forex, etc.
It should include items like:
- Pre-market routine (scanning, making focus list, etc)
- What market environments you will trade.
- What trading instruments you use (stock, options, etc), recommendation is to a have separate section in plan for each type or even to have a separate plan for each.
- How much you are allow to lose in a day, week, month before trading is curtailed.
- Specific strategies that you will trade (BO/BD,3BP, etc).
- Rules on position sizing.
- Management rules.
- Disaster Rules, what happens when your swing trade encounters a mega gap.
- Your trading universe if you have one.
- Do you keep a trading diary? If so document how and when you use it.
- Rules for documenting (spreadsheet) and reviewing your trades.
- Plan for continuing self improvement both as a trader and human being (if you improve as a human being you'll also improve your trading because you will be more emotionally balanced).
Those are just some of the things that must be included in your plan. There are probably at least ten thousand other things you could include. I would advise you to put everything you can think of into your plan so that as your day progresses nothing falls through the cracks!
That's just a brief outline to get you started. Feel free to join the New Trader's Support Network at Locals.com and we'll be happy to help you get started in creating your trading plan or improving your trading plan if you already have one.
Happy Trading!
2 trades for me today with +1.5R total
1st Trade QCOM +2R
148.39/149.97 exit 143.25
12% gap down under pivot support and 50ma after a strong daily double top rejection,. I took it on a congestion breakdown with a fairly wide stop, leaving my 2R target 50c over its ATR, slow but consistent move down with great RW, hit my target on the penny before it bounced.
2nd Trade AQB -0.5R
9.40/9.70 exit 9.56
I rarely trade stocks under $10 and even more rarely short them. I liked this daily chart as it broke its uptrend channel and stayed under a strong 9.50 support line enough room to its daily 50ma. I entered after a pullback with a fairly wide stop but only 1/3 of its ATR used at the time. It failed to break down with the strong market open and stayed in a narrow range.
I actually broke my plan with this trade as I lowered my stop to a pivot where price made a big bounce earlier at 11am with a large seller sitting there. My thought was that if it breaks that level again then it will likely...
1 trade for (-1R)
I took a BD on QCOM. I was worried about the target being close to the daily range, so I took a tighter stop on the 2 min chart. I am looking through PTS right now, most of the examples have 2 options for where to put your stop. It looks to me like one of the stops would be at the bottom of the main consolidation area, and the other at the bottom of where there has been a shakeout or turnaround bar (if there has been one). Due to the daily range I took the tighter one on this. In hindsight it seems obvious to take the wider stop, but in the moment it looked ok.
I was then looking at the 15 min 3BP on QCOM, but the reason I used a tighter stop in the first place was because of the range. The 15 min 3BP would have needed to have gone even further than the wider stop on the 2 min BD, so I didn't take it.
