Trading Tips

Putting Together Your Personal Trading Plan – Part I

In my last post, The Required Elements for Your Trading Plan, I started taking you into the nitty gritty of putting together your own personalize trading plan. Today we start looking at the real details. As has been the case all along in this sequence, what this post excerpts from The Essentials of Trading.

Trading Objectives
What have you determined to be your goal(s) for trading? Most of the time this can be expressed as profits (either in currency or percent return) per unit of time. For example, you might chose a goal like making $500 per month, or achieving average quarterly returns of 5%. Maybe you want to frame your objective in terms of risk adjusted return, and so set a goal based on the Sharpe Ratio or similar measures (covered later).

Whatever you select, based on the assessments you did in the previous section of this chapter, make sure you have something both definable and measurable. Do not short-change yourself by setting a goal like “make money”. Remember, part of the value of a Trading Plan is in its ability to help in performance assessment. If no measuring sticks by which to compare actual results with planned ones are included, the whole purpose is defeated.

Market(s) and Instrument(s)
Will you trade options on equity indices? Are you going to use the futures market to trade in gold? Will you be trading spot forex? Maybe it is all of the above. Regardless, make sure you outline clearly your intentions in your Trading Plan. When getting started, it is generally best to stick with one market and/or instrument. Additional ones can be added as knowledge and comfort increase. As noted throughout, we will primarily use forex for the examples going forward.

Trading Time Frame(s)
What is the time frame in which you will be trading? Are you going to be a day trader? A swing trader? A long-term trader? Again, it probably is best for the new trader to work exclusively in one time frame to gain a good understanding of operating in that manner.

Software, Hardware, and Other Tools
Outline the things you will use in your trading. This includes the computers system or systems, the software, the data feeds, and the internet access which will drive your trading and analysis. Make sure that you have some kind of back-up plan in place should your primary system fail during a critical time. There is nothing worse than being unable to make trades or adjust orders because your internet service is down.

New (and experienced) traders can get caught up with all the fancy software and other stuff that is available. Try to avoid going overboard. Trading does not really require all that much beyond a way to enter and monitor trades and keep track of prices. As you develop your analytic techniques and methods, you may find that a certain kind of software package, source of data, or some other tool or resource is a good addition to your trading repertoire. Be selective, though.

Risk Capital
This was addressed fairly comprehensively in the assessment earlier. During the early learning and development process, one should stick to demo accounts. Once you have a firm handle on trading and are comfortable with your trading system, then you can shift over to real money trading.

Broker/Trading Platform
You defined earlier what market(s) and instrument(s) you are going to trade. That dictates, to a certain degree, how you go about trading in terms of where you get your trades executed. There are a number of different options available regardless of what you plan on trading.

A good resource for finding a broker or trading platform to suit your needs is Trade2Win. The site has member reviews of brokers (and other trading resources), plus discussions of them in the message boards where questions are answered.

The next post in the sequence continues the discussion of your trading plans specifics.

By John

Author of The Essentials of Trading