Specialty Skills

Your Trading Plan Is Essential

woodyjohnson
Dr. Woody Johnson
Instructor

What is the first thing that you do when you want something with an intense desire? When you want it so bad you can taste it? When you can feel the desire in your bones? When you’re driven by a desire that leaves you hungry for it? With this kind of emotionally passionate focus, you automatically begin to think about “how” you can get it. In other words you begin to plan. The “how” or “plan” charts the way to achieving the desired item…no matter what it is and no matter how small or large. Planning is essential to the process of achievement and without it you would come as close to accomplishing the goal as you would if you were to be blindfolded and spun around and given a bow and arrow to hit a bullseye 100 yards away. Trading requires planning at both the macro level (the big picture) and the micro level (the small picture or plan for every trade).

Now, many of you reading this article are trading without a plan.  That’s very unfortunate … for you!  If you don’t have a macro trade plan and you are trading then you are “out-of-sequence” in your trading process.  Your success as a trader depends on a number of items that include market knowledge, a set of rules, money management and risk management, and self-discipline to explicitly follow these trading necessities.  Your plan would include all of these elements and others to construct a vehicle that is designed for getting the results you want. Without a macro stock trading plan you lack the “big picture,” the overview map that holds the “how” you would proceed.  Furthermore, what are you telling yourself to justify not having a macro trade plan?  Here are some examples:

I have no idea how to write one,

I don’t consider it necessary,

It’s boring and time consuming,

Successful traders don’t have plans

I have a mental plan.

Of course, there are all types of excuses, but the bottom line is that they are excuses, and they are standing between you and setting yourself up for getting effective trading results.

Let’s take a look at some of the essentials that would go into your macro trade plan.

  1.  Create a cover sheet with the name of your business and this will establish the intention of treating your trading like the real business that it is.  Your cover sheet and name may seem inconsequential, but having an emotionally focused label is powerful.
  2. Establish your purpose for trading, the compelling reason why you want to trade.  You’ll want to tie this to the what-matters-most in your life in order to “harness” the passionate energy associated with it.  Things like family, friends, personal freedom, and those things you’re “hungry” for.  Answer the questions: I want to learn to trade because…   My primary objective of learning to trade is…   These objectives are important to me because…   I believe I can achieve my goals because…
  3. Identify your trading style in order to help you define your risk management strategy and the tools you’ll use to trade.   Answer these questions:  My trading style is…   I have chosen this style because…
  4. One of the toughest obstacles in trading is not the market, but rather the trader, him or herself.  A simple personality profile questionnaire will help you determine your strengths, weaknesses, how you handle losses and your expectations.  There are many resources available on the web to help you evaluate your personality.  Here is a link that can help:  http://www.outofservice.com/bigfive/   Then answer these questions:  My greatest strength is…  My greatest weakness is…  Potential problem areas are…
  5. Goals should be set to help you evaluate your progress, and give you a target for which to aim.  These goals should be both mechanical data (direct and indirect information related to the markets) and internal data (mental and emotional) goals.  An example of a mechanical data goal would be to beat the S&P 500 index in returns over a 12 month period.  An example of an internal data goal would be to read 1 book every 2 months to sharpen your trading knowledge.
  6. Identify the markets you want to trade; that is, those markets that your personality resonates with.  Also, determine the details of these markets for instance, Forex because you live on the West Coast and you’re a night owl and you particularly like the British Pound vs. the Japanese Yen pair.  Finish these sentences:  I will trade the following instruments…  I am trading these instruments because…  My trading times will be as follows…
  7. Make sure that your technology is up to date, free of bugs and with an IT (information technology) person on call in case your computer goes down.  Trading online demands a powerful and reliable system.  Ensure that you have one and that it is backed up.  Additionally, get a strong internet provider…cable preferably.  Going further you’ll want a trading platform that you trust both for data streams and for accurate fills.
  8. Effective routines lead to good habits.  Create a routine for the beginning, middle and end of your trading session; i.e., pre-market routines for both mechanical data (research, news, zones, time frames, indicators) and internal data (meditation, taking your emotional temperature, and lowering stress levels in order to be focused and ready for the trading trenches.)
  9. Gauging your risk is critically important at all times.  Categorize what you can control and determine how you will manage it.  For example, having limits on every trade you enter.  The prime directive is to protect your capital at all times.  Limits such as having a max number of shares/lots/contracts per trade; having a max loss per trade; and identifying a max loss per day are very important.  Complete these sentences:  I will gauge my risk on each trade by…  I will risk only _____ on any one trade…  My daily stop loss will be…  Once my stop is reached, I will…
  10. Have your protocols (strategies, procedures, setups and entry rules) spelled out.  Many strategies exist for trading, and every one does something different.  What will your approach be?  What tools will you use when you trade (mechanical/internal)?  Complete the following phrases:  My primary reason for entering into a trade will be…  My secondary reason for entering into a trade will be…  My ideal setup would be…
  11. Your review process is just as important as what you put into your macro trade plan.  Weekly, monthly, quarterly and yearly reviews would not be too much.  Remember it’s a living document meaning that it evolves as you do and you’ll want to have an intimate relationship with it.  It is your trusted vehicle for taking you and your A-Game to success.  Ask yourself these questions:

What securities are you trading more consistently?

What indicators work best for you?

Are you adhering to your stop loss plan?

Are you achieving your trading goals?

What times do you trade best?

What is your optimal share size?

Yes, planning is of paramount importance and if you put the time in to construct a good macro trade plan you will have laid out your road map to getting the results that you want.  If you haven’t written your plan yet or if it is not a strong model, then stop trading and do it now.  Your success is too important to trade by default; i.e., just doing what you feel without a plan…you want to design your path and include everything that you’ll need for that journey.  Remember success is where preparation meets opportunity.

Happy Trading

Disclaimer
This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.