Login   |   Register   |   Sunday, April 20, 2014
Sample Trading Plan

 

Most traders wash out because of a lack of discipline.  That's why every trader needs a trading plan.  Defining a trading plan and sticking to it helps prevent the most costly errors such as not exiting when a trade goes against you, throwing money at everything that moves or looks good, and doubling up on size when you're losing.  (Losing streaks should cause you to reduce share size, not increase it.) 

To give you an idea what a trading plan looks like, I've created a sample plan for your review.  Please note that this plan contains some gaps into which private financial details would normally go.

 

Introduction

Overview

A  This trading plan has evolved over the last nine months based on my experiences.  I have gone from wanting to only swing/position trade (multi-day to multi-week holds) to realizing that my strengths seem to lie in the intra-day scalps of the S&P futures.  Therefore, while this plan covers stocks and futures as well as day-trading and swing/position trading, my current focus is day-trading; trying to pull one point out of the market every single day.  Since shifting to this strategy, I have found that I am calmer and feel more in control.

B  I am currently still attempting to achieve my short term goals on a consistent basis.  Thus, while this plan covers a lot of ground and goes way out in the future, my current state is still "stage 1" so to speak: Achieve the short term goals so that I can move on to the intermediate term goals.

C  This plan was last updated on May 24, 2003.

Format of this document

A  This document is divided into a number of clearly marked sections. These sections include Objectives, Money Management, Tools and Strategies.  Where appropriate, I have separated out rules that are specific to a particular style of trading (for example, some things only apply to day trading), a particular instrument or a particular time-frame.

B  This document references a matrix on a  spreadsheet that outlines my Asset Allocation for various types/styles/strategies.  This matrix is primarily used during the Money Management section.  So that things aren't confusing, let me just say that the Asset Allocation matrix is simply expressing how much capital should be tied up in the short term as I go through the learning process versus how much will be used once I've proven that I can do this job!  Of course, since this is a public forum, you aren't going to get to see that sheet.

 

Objective

My objectives can be divided into three parts - Short Term, Medium Term and Long Term.

Short Term

To earn, on average, 1 futures point per day per contract.

Intermediate Term

After achieving (A), work my way up to trading 20 contracts and achieving equivalent results.

Long Term

To consistently make $xxx.xx per month (using a $yyyK portfolio) which translates to about 30% per year while keeping my batting average above 55% and my drawdowns to a minimum, which in my case is maximum 20%.

 

Discussion of Edge

A good trader knows what constitutes his/her edge.  A trader cannot trade without some sort of a statistical edge combined with a psychological makeup suitable for trading.   I view the components of my "edge" as follows:

1. No requirement that I HAVE to trade.  I can be patient and wait for the high odds trades with good risk/reward ratios.

2. Money Management - By taking the high odds trades with an average R/R ratio of 3:1 (for swing/position trades), I only have to be right one out of four trades to break even.

3. Mastering a few setups and sticking to them, taking every trade that meets the setup criteria and passes the filter checks.  (These setups and filters are defined below.)

4. Commitment to education - I have not minimized the educational process and have invested heavily in coaching/mentoring and intend to do so for the long term even as I become profitable as a trader.  I believe that alternate opinions always help ground me.

5. I have a solid trading plan!  I follow the plan and let the probabilities play themselves out.

 

I. Share Size Lots

I will determine the number of shares I trade at any time using empirical calculations related to % of capital risked and NOT emotions:

A  See the Asset Allocation tab/sheet to determine the risk capital for each strategy type and the average amount of shares to be traded.

B  I am currently trading the short term section of the asset allocation sheet.

All trades are subject to the rules in the Money Management section below, describing max loss per trade.

 

II. Money Management

A General

Parameters Relating to Personal Swing, Position and Day Trades

i Maximum Loss Per Trade

1. On any given trade, I will not be risking more than 2% of my capital that is allocated to this type of Trading (Swing/Position).  More often than not, I will probably be risking 1% per trade (which gives me 6 open positions @ 1% or 3 open positions @ 2%).

ii Maximum Loss Per Week

1. In any given week I will not lose more than $2500.  If my last trade puts me over this amount I promise myself that I will shut off Tradestation® FOR THE WEEK.  I will use that time to re-evaluate the strategy, incorporate any changes if necessary, and paper trade until I am confident that the strategy continues to have a positive expectancy.

iii Maximum Loss Per Month

1. In any given month I will not lose more than 6% of the portfolio allocated to Swing Trades.  If my last trade puts me over this amount I promise myself that I will shut off Tradestation® FOR THE MONTH.  I will use that time to re-evaluate the strategy, incorporate any changes if necessary, and paper trade until I am confident that the strategy continues to have a positive expectancy.

iv Overriding Maximum Losses

1. If at any time I have lost 6% of the portfolio value allocated to Swing-Trades, I will stop trading for the month - period.  I will use that time to re-evaluate the strategy, incorporate any changes if necessary, and paper trade until I am confident that the strategy continues to have a positive expectancy

v Trail Stopping the Profits

1. Since my goal in money terms is $15,000 per month, at any time on any day that I reach half that goal which is $7,500, I will enforce a 'break even' stop on all open swing trades, ensuring that a winning month does not turn into a loser.

2. Once my goal of $15,000 is reached, I will immediately enforce a $7,500 profit stop to ensure that once my goal is reached, I will keep at least half of my monthly goal.

3. Once I reach $22,500 I will raise my stop on the swing trades to $15,000 to ensure that once I have exceeded my goals, I will at least keep all of my monthly goal.

4. From that point forward, I will enforce a 60% trailing stop on my profits.

B Specific Rules Relating to Styles

Rules Relating to Day Trades

1. I will take no more than three trades in any one day, thus risking, at most, 6% of my capital in any one day.

C Share Size Reduction

Day Trades

1. Three losing trades in a row will cause me to reduce the number of shares I trade by 50% until I have three winning trades in a row.

2. Five losing trades in a row will cause me to reduce the number of shares I trade by 50% until I have three winning trades in a row.

3. Three losing days in a row will cause me to reduce the number of shares I trade by 50% until I have two winning days in a row.

4. Five losing days in a row will cause me to reduce the number of shares I trade by 75% until I have two winning days in a row.

5. These guidelines are further subjected to the Days Off rules in section IV below.  (This means that I reduce share sizes the day AFTER I return from my forced day off.)

Swing/Position Trades

1. Three losing trades in a row will cause me to reduce the number of shares I trade by 50% until I have three winning trades in a row.

2. Five losing trades in a row will cause me to reduce the number of shares I trade by 50% until I have three winning trades in a row.

3. These guidelines are further subjected to the Days Off rules in section IV below.  (This means that I reduce share sizes the day AFTER I return from my forced day off.)

D Maximum Loss Before I Give up on this Career

1. I will completely give up on this career after losing $50,000. 

 

III. Strategies and Timeframes

In general, I want to focus on swing and position trades.  Intra-day scalping is off limits.  However, intra-day multi-hour swing trades where the gain goal is at least .50 are fine.

[Important note:  The rest of this section includes SAMPLE strategies only.  They are here for illustrative purposes so that you have an idea on how to create your own.]

Different strategies will be used for different timeframes and instruments as follows:

Day Trades

Strategy: Reversion to the mean

Trading Price Range: Stocks > 10.00, Commodities

Trading Instrument: S&P e-mini, Commodities with good liquidity, Stocks

Holding Period : 4 hours or les

Timeframe: 5 min chart, 15 min charts, 30 min charts

Enter: Long if the ADX > 30 and +DI > -DI and an entire bar is painted below the 4 period SMA. Go long above the high of that bar.

Enter: Short if the ADX > 30, -DI > + DI and an entire bar is painted above the 4 period SMA. Go short below the high of that bar.

Stop: Below the log of the trigger bar for logs, above the high of the trigger bar for shorts

Exit: 1/2 at a retest of the prior swing high/lows, move stop to BE and let the rest ride.

Filter: ADX > 30 and +DI > - DI for Longs

Filter: ADX > 30 and -DI > +DI for Shorts

 

Strategy: LBR60MinSwings, LBR120MinSwings, LBR180MinSwings, LBR240MinSwings, LBR60MinSwing2, LBR120MinSwings2

Trading Price Range: N/A - S&P e-mini only

Trading Instrument: S&P e-mini only

Holding Period: Multiple Days

Timeframe: 60 min, 120 min, 180 min, 240 min

Enter: Break of first bar that has a 2.5 ATR swing from the prior swing low or high.

Stop: Various depending on time frame - from 10 points to as much as 40 points

Exit: At specific profit targets depending on timeframe.

Other: This is an automatic enter and exit trade. No discretion - enter when the signal is given, exit when stop is hit or target has been hit.  It has been coded into Tradestation 7.0 strategies but, because it cannot tolerate slippage, manual entry and exits must be employed.

 

Strategy: 35 min breaks

Trading Price Range: > 10.00

Trading Instrument: QCOM, QLGC

Holding Period : 6 hours or less

Timeframe: 35 min chart

Enter: Price breaks the 35 min range

Stop: Opposite end of the 35 min range plus 1 penny.

Exit: End of Day

Other: This is an automated trade that you must enter EVERY day that it's triggered.  It is a probabilities driven trade that needs to capture trend days in order to be profitable at the end of the year.

Swing Trades

[To be completed - I'm not using this section right now so no point in putting it in but it should look similar to above.]

IV. Selection of Trading Instruments

Different strategies will be used for different timeframes and instruments. Therefore:

A - I Will Select my Trading Instruments as Follows:

i - Futures - Day Trades

I will play only futures with the following characteristics:

1. Volume > 500,000 contracts/day

2. Average bid/ask spread of 1 tick

3. Minimum ATR of 10 points/day


ii - Futures - Swing/Position Trades

I will play only futures with the following characteristics:

1. Volume > 50,000 contracts/day

2. Average bid/ask spread of 2 ticks or less

3. Minimum ATR of 3 points/day


iii - Stocks - Day Trades

I will play only stocks with the following characteristics:

1. Volume > 1,500,000 shrs/day

2. Listed on NYSE, NASDAQ or AMEX only

3. Stocks with a channel of at least 5 points. If I take 10% of the channel, that's .50 cents.


iv - Stocks - Swing/Position Trades

I will play only stocks with the following characteristics:

1. Volume > 500,000 shrs/day

2. Listed on NYSE, NASDAQ or AMEX only

3. Stocks with a daily channel of at least 2 points.

 

v - I will not trade the following because at this time I am NOT qualified:

1. Options

 

V. Seasonal Periods to Avoid

1.  Summer: August through the first two weeks of September because of low volume.  Overnight trades are a no-no, reduce lots to 1/4 and play only the very high probability setups. 

2.  Christmas: Between Christmas and New Year's because of low volume.  DO NOT TRADE. 

3.  Thanksgiving Week because of low volume.  Overnight trades are a no-no, reduce lots to 1/4 and play only the very high probability setups. 

4.  Options Expiration/Triple Witching Fridays because of the insane amount of volatility.  I will only manage OPEN positions.  I will not initiate new positions on these days, but will close existing positions as they hit targets.

 

VI. Continuing Education and Days Off

 

1.  I will take a half day off every week, and a full day off any week in which I accomplish my goal three days in a row.  

2.  I will take a day off any time I have three losing days in a row, even if they were not maximum loss days.  

3.  I recognize that good traders never stop learning.  I will continue my education in the following ways on the following schedule.  

  • - Books...

  • - Seminars...

  • - Mentorships...

  • - Web Research...

  • - Self Improvement tapes or courses (non-trading)...

 

VII.  Core Reference Materials

1.  I Will Use the Following Reference Materials:

  • - Trading For a Living by Dr. Alexander Elder (Category: Entry Level) 

  • - Come Into My Trading Room by Dr. Alexander Elder (Category: Entry Level) 

  • - The Master Swing Trader by Alan Farley (Category:  Intermediate) 

  • - Trading Classic Chart Patterns by Thomas N. Bulkowski (Category: Reference) 

  • - Encyclopedia of Chart Patterns by Thomas N. Bulkowski (Category: Reference) 

  • - Japanese Candlestick Charting Techniques by Steve Nison(Category: Reference) 

  • - Profitable Candlestick Trading by Stephen W. Bigalow (Category: Reference) 

  • - Technical Analysis of the Financial Markets by John Murphy (Category: Reference)

 

VIII.  Technology and Tools

 1. Trading Platform:  

  • - Tradestation 8.x

  • - e-Signal datafeed as a backup

  • - AMIBroker with METAStock/Reuters end of day data for portfolio testing

 2. Scanning Software  

  • - Tradestation 8.x with Radarscreen

 3. Connectivity 

  • - DSL w/CABLE Modem Failover

  • - 56K phone line as backup

 4. Trading Chat Rooms and Web Sites 

  • - LBRGroup

  • - MRCI.com

 5.  Other Utilities 

  • - MS Office (Word, Excel, etc.)

  • - Windows XP Professional

  • - Hardware and Software Firewalls