Method to the Madness (Part 2)

Method to the Madness (Part 2):


Do You Have a Trading Plan? If NOT… Take Note!

A trading plan is an essential tool if you want to be a successful trader.

Preparing your trade ensures you take advantage of opportunities while preventing catastrophes. I believe that preparing a complete plan before entering any trade is mandatory. Devastating losses usually happen to traders who fail to plan.

Traders who fail simply don’t know what they want or how they are going to get it.

A trading plan is your blueprint to success. It should include your objectives, procedures, and most of all, your trading system.

A trading plan MUST be written down.

Most of all, a trader must have the discipline to stick to it.

The plan must contain:

·        What market are you trading in? e.g.: stocks, options, etc.

·        Your Entry signals

·        Your Exit signals

·        Your Risk Management

·        Your Money Management

Consider the difference between a trader who answers these questions (plus more) and one who does not. It makes sense that the better prepared trader will make fewer mistakes. He will also enjoy a greater percentage of wins.

In a sense, this process allows you to come up with your own winning system. With a little experience you will put together a fool-proof system that delivers the good results you deserve.

Treat your business of share trading with the importance it deserves. Why risk your money, if you do not want to treat it as a business. Suppose you were to purchase a business trying to create an income and life style for your family. Would you not take the time to assess every detail necessary to succeed? I am sure you would.

Share trading gives you the chance to create a life style for you and your family, a life style to give you the opportunity to really enjoy life.

So sit down now and create a plan to give you exactly that.

Clearly write out your goals.

Are you trying to create more disposable income?

Do you want to increase your retirement funds?

Are you trading for fun and excitement?

How much time will you spend per day carrying out your business?

Are you psychologically prepared to be a share trader?

How much capital do you wish to allocate to your trading plan?

How much risk can you tolerate?

Will you be day trading, medium term trading, long term investing?

Consider the difference between a trader who answers these questions and one who does not. It makes sense that the better prepared trader will make fewer mistakes. He will also enjoy a greater percentage of wins.

Now let us look at a sample trading plan. But remember, your trading pan is your own, personal plan. Do not copy somebody else’s plan. Modify it to suit your own style. You have to follow it to the minute detail, you have to own it.

Ok, here is a skeleton plan.

·        I will daily search my target market for entry signals

·        My scans will be as follows:

·        My entry signals are:

·        I will open a trade as soon as all my entry signals are in place

·        I will size my position according to (my money management plan)

·        My exit signal will be:

·        How do I set my stop loss

·        I will exit when my stop loss is hit.

·        I will record my trade in my trading diary.

Note: these are the minimum steps you should enter in your plan. Be specific, describe your entry and exit points in detail. Your trading will then become mechanic, cutting out emotions.

As time goes on and you become familiar with your plan, you can start to refine it bit by bit. But give it a chance to work first.

Trading System: The Entry 

A few entry options, for example:

• breakout of a recognized chart pattern
• breakout of significant resistance
• pullback to support after a strong breakout
• pullback to strong support after a rally

If you’re developing a trend following system, then moving averages will give you a good indication of a trend having started. You can choose single, double, or triple crossover methods, whichever appeals to you. Another idea is to find a security that is trading at its recent high, perhaps by seeing if the highest price in the last 200 days has occurred in the last three weeks, as this indicates it is in the process of going up.

You can also look at countertrend movement, and try to trade for the reversal. For instance, if the security shows good support and resistance, you can buy long when the price drops to the support level in anticipation of the bounce. You can apply the same principle to trend lines. Another way is to watch the retracement of a trending stock, and be ready to make an entry at the first sign of a turn at the 50% level.

An alternative is to pick an oscillator, decide at what level it indicates overbought or oversold, and include in your system what value this has to be for you to consider it a reversal point. You should usually look for confirmation from a separate indication, so you could also include price patterns or candlestick patterns that you want to see before entering a trade.