Investing without a trading plan is like storming the
battlefield without pants, carrying an empty gun. Swaggering into trades with George W. Bush “gut feel” combined
with bold action has no place in a trader’s arsenal. When things turn against you on a trade, your
objective mind can no longer be completely trusted, and a solid trading plan
will provide the script to bail you out with minimal damage, provided you follow it! The most unreliable portion of the trading plan is the person executing it! Commit to your plan.
At a minimum, a trading plan includes a trading strategy, a
money management parameter, a position size element, and a psychological component. When writing your plan ask yourself the following question, “Based on my plan, would somebody be
wise to give me money to trade?”
This trading plan is catered to my unique brand of
psychological dysfunction and should be used merely as an example. It’s based on personal trades and episodes of losses on my part, hence the heavy emphasis on psychology and stops. I feel that every trading
plan is personal, and everybody should develop their own system based on their
own strengths and weaknesses.
When I began writing a plan several years ago it was heavily slanted towards setups and entries, with arbitrary stop losses that were not based on anything other than a % loss; very bad design by an enthusiastic beginner. Setups are the most versatile and fun portion of trading, but probably the least important element. A simple coin flip to determine a long or short entry could be effective if combined with proper money management. Nobody wants to hear this, but I feel traders should focus on the downside risk before dreaming of the upside. Every point below has a personal experience attached.
Initiating positions / position sizing
- Any reasonable technical entry is acceptable, long or short. The KISS principle applies, and entries should be as close to obvious technical exits as possible. The closer to the stop, the larger the position size can be.
- Don't anticipate reversals and market movement in general. Wait for a clear signal. Favor failed breakouts or breakdowns.
- Focus on individual stocks rather than futures, etfs.
- Option trading or 3x leveraged etf's are banned.
- Position sizing is based on distance to the stop, with no more than a 2% total account loss allowed. Example: if the logical stop is 10% away from entry position, adjust size to allow less than 2% of total account loss if thesis failure occurs.
- Time horizon on any trade is optimally 1-7 days.
Closing successful positions (this is my weakest area)
- Minimally, the target should be 2-3 times the downside risk.
- Close position before ideal target is hit. Don't gun for top tick.
Closing losing trades / risk management
- Stop losses are firm, and cannot be negotiated to a lower support zone.
- No position can result in a loss greater than 2%.
- Recognize you will be incorrect very often, smashed upside the head, water boarded, beaten up, humiliated… and you're still playing the game correctly.
- There's nothing terrible about admitting you know little or nothing (it's true!). You have incomplete information and compete at a disadvantage to larger traders.
- When analysis is done and the trade is placed, stop analyzing! Thinking with clarity is only possible before the position is opened. No analysis is objective beyond that point. Emotional analysis on open positions falls into the "human nature" category and is the enemy of successful trading
- There's no excuse for avoiding obvious losses. Only a fool hides in the trench hoping everything will work out fine (the very definition of the "slope of hope".)
- Distribute eggs over many baskets
- Never open positions around earnings season. Close current positions before earnings.
- Restrict total leverage to 200%
- Don't try to "get even" through increased risk taking following a loss.
- Don't trade when feeling beaten, bloody, and exhausted. Use your creative outlets to repair your brain and refocus.
- Avoid gurus. They know nothing and have an agenda (worse than knowing nothing).
- Never forget the math. A solid 100% gain is lost by a sloppy 50% loss.
Most important point!
Remember, you might be a ornery and disagreeable chap, but dozens of people love and depend on you. Think of them, and strive to make them proud.