Hello and welcome to my online trading journal. As I once again revamp my site in order to utilize it more efficiently, I thought it fitting that I start out by posting about one of the most important tools any trader can have: A Trading Plan!
Elements Of The Plan
So what exactly makes a good trading plan. This can vary for many traders and there really is no one correct collection of elements that make any specific plan a great one. For me, I need my plan to have the following 10 elements: # of trades used to evaluate my performance, performance, time of day to trade, trading edge, which instruments to trade, stop loss, profit target, risk per trade, risk management, and time off.
Evaluating My Performance
How do I plan to determine if I am trading successfully or if I am going down in a fiery ball of flames? In the corporate world, I was usually given a 90 day probation period whenever I started a new job. In trading, I could have already exhausted all of my trading capital by that time (Yes, it has happened before), so I’ll need to use a much shorter sampling period to monitor my performance. For now, I will set that period at 6 trades (adding in to an already open position will not count as an additional trade for the purpose of this exercise). After I have completed 6 trades, I will create a post highlighting my performance over those 6 trades.
There are two metrics that I plan to use to measure my performance: reward/risk ratio and maximum draw down.
For my reward to risk ratio, ideally I would like to see it at 3:1. That means I would like to see the sum total of my winning trades at 3 times the sum total of my losing trades. If I am able to maintain this ratio, this would allow me to miss 75% of my trades and still be profitable. Of course I would not want to lose 75% of my trades, but knowing I can will allow me to focus on my execution and not my P&L.
My max draw down during any given trading cycle will be set to $1200. This is the limit I will use starting out. In the risk management section of this list, I will explain how I arrived at that number.
When To Trade
My trading day will run from 6:00 am EST. to 2:30 pm. EST. Their will be times that I choose to trade outside of this period, but at least initially, this is the plan.
My Trading Edge
I am by nature a price action trader. I look for entries at the areas I consider to be key entry points: the trend line, the moving average, support (if I am entering long) and resistance (if I am entering short). My strength is my pre-trading analysis. I start out using a weekly chart and I drill down. For the purpose of this exercise, I will be using a 500 tick chart to base my entries off of (this is something new to me that i have been testing and I’m really excited about using). My focus will be to let my winners run and cut short my losers.
Which Markets To Trade
The two main markets I will focus my attention on will be: the S&P 500 futures market (ES), and the Crude Oil futures market (CL). As a backup to those two markets (for when volatility is lacking) I will have on standby the following markets: the Nasdaq 100 futures market (NQ), the Gold futures market (GC), the Euro FX futures market (6E), and the British Pound FX futures market (6B).
Ideally, I will try to keep very tight stops. No more than 10 ticks. I do have to be flexible with this depending on what my chart analysis is telling me, but this is the plan for now. I will assess and correct this after each trading period evaluation as necessary.
Each trade’s profit target will have a profit target specific to that setup. Ideally I am looking to get a better than 3 times my actual risk on every trade, but I don’t plan on limiting myself in circumstances where the market is on a tear.
Risk Per Trade
Based on the evaluation period of 6 trades and max draw down of $1200.00 per period, I can risk $200 per trade.
This is probably the most important aspect of trading that you can force yourself to learn. Preservation of capital is very important to a day trader. In my mind it isn’t how much I made on any given day, it is how much I did not lose. Good traders have a saying that they live by, “Live to trade another day”!
One of my mentors, Darrell Martin of Apex Investing Institute, has a great post on his forum about risk management, it even has an accompanying YouTube video. It’s called Risk Management And Your Frame Of Mind: The 5% Rule . I encourage everyone to go on over to his site and check it out. In fact, I encourage you to sign up for a free membership and explore all of the information that is contained within it. If you are just getting started on learning how to trade, I would say that the best place to start out is there.
Everyone needs a break. It’s true! Unfortunately we don’t always know when to actually take one. I am extremely guilty of this. If I’m being honest with myself, I do not have planned breaks set in my trading plan and that is something I definitely need to correct. My goal for the end of first quarter is to have a plan in place and modify it here in this section.
It’s A Wrap!
That pretty much sums up my trading plan. I feel I need to let everyone know that I consider myself a beginning trader, so please take what I post here in my trading journal in that context. That being said, I love to share ideas and learn from others. I really believe that this journey that I have been on is a path to a very bright future, and one which I am always continuing to learn. If you ever have any questions regarding this post or any other, please ask away in the comments section.
I’m also very active on social media and you can find my social media links in the header above. Check me out, follow me, engage me in conversation. I hope to learn as well as share what I have learned. Good luck and good trading!
edit: change to reflect correct bar size chart that I am basing entries off of.