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10/18/2010 BUMASOFT WHY AND HOW TO WRITE A TRADING PLAN? Successtasy.com | Victor Marian Busoi October 18, 2010 WHY AND HOW TO WRITE A TRADING PLAN? Table of contents Introduction͙͙͙͙͙͙͙͙͙͙͙͙͙͙͙͙͙͙͙͙͙͙͘͘ƉĂŐĞϯ Chapter I: Why should I write one?..........................page 4 Chapter II: What should it contain?..........................page 5 Chapter III: Why do you want to trade?....................page 6 Chapter IV: What is your edge?.................................page 7 Chapter V: What are your weaknesses?....................page 8 Chapter VI: Weakness removal plan͙͙.....................page 9 Chapter VII: Time devoted to trading͙͙͙͙͙͙͙͙͙page 10 Chapter VIII: What͛s your style?.......͙͙͙͙͙͙͙͙͙.page 10 Chapter IX: What markets will you trade and why?...page 10 Chapter X: Time management plan͙͙͙͙͙͙͙͙͙͙.page 11 Chapter XI: Entry criteria͙͙͙͙͙͙͙͙͙͙͙͙͙͙͙͙.page 11 Chapter XII: Exit criteria͙͙͙͙͙͙͙͙͙͙͙͙͙͙͙͙͙page 12 Chapter XIII: Money management͙͙͙͙͙͙͙͙͙͙͙page 12 Chapter XIV: Strategy monitoring plan͙͙͙͙͙͙͙..͙page 13 Chapter XV: Strategy adjustment plan͙͙͙͙͙͙͙..͙.page 13 Chapter XVI: Trading software/budget͙͙͙͙͙͙͙..͙page 14 Chapter XVII: What broker will you use and why?͙..͙page 14 Chapter XVIII: Deposits/withdrawals plan͙͙͙͙͙͙.͙page 14 Chapter XIX: Can you support yourself?͙͙͙͙͙͙..͙..page 15 Chapter XX: Starting balance͙͙͙͙͙͙͙͙͙͙͙͙͙..͙page 15 Conclusion͙͙͙͙͙͙͙͙͙͙.͙͙͙͙͙͙͙͙͙͙͙͙͙..͙page 15 2 October 18, 2010 WHY AND HOW TO WRITE A TRADING PLAN? Introduction 99% of successful traders have a written trading plan, while 99% of losing traders lack
such a written plan. This should ULQJDEHOOWR\RXLQFDVH\RX¶UHQRWGRLQJWKDWZHOOZLWK\RXU
trading business. A trading plan, along with a business plan, is one of the most important aspects
of trading, yet most people fail to realize that.
Having a detailed, written trading plan, UHDGLQJLWHYHU\GD\VWDQGLQJE\LW¶VUXOHVDQG
adjusting it as you gain more and more experience, could make the difference between a LOSER
and a WINNER. Not only does it keep you organized and eliminates most of your fear and greed,
but it also helps sink your trading system into your subconscious mind, along with your
daily/weekly/monthly targets. Your subconscious will thus inspire you self-confidence and do
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why it is so important that you set your goals and plan your business.
This short book will provide you with a concise guide in writing a good trading plan, what
you should write in it and how you should use it on a daily basis. All success is gained by
transforming your desire into a BURNING obsession. Then, that subconscious energy will soon
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3 October 18, 2010 WHY AND HOW TO WRITE A TRADING PLAN? Chapter I: Why should I write one? ¾ since it contains strict entry and exit rules, as well as money management rules, it
helps you test your system by helping you follow those rules and partly eliminates
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¾ "If you don't know where you are going, any road will take you there." Lewis
Carroll ± if you want success, you obviously have to be organized and create a
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self-confidence and you are USED to doing things the wrong way. This insecurity
of yours confuses you. A trading plan, carefully read each and every day,
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goals and what you can do to finally reach them, can help reprogram your
subconscious mind. It will help change your bad habits into good habits.
These reasons should be enough to convince you that you need to put your brains to work
and build a trading plan today! If you want to trade successfully, treat it like a business. And if
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people do business is by planning ahead. Successful business men are highly organized people.
4 October 18, 2010 WHY AND HOW TO WRITE A TRADING PLAN? Chapter II: What should it contain? There are 18 major components of a trading plan:
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why do you want to trade?
what is your edge?
what are your weaknesses?
weakness removal plan
time devoted to trading
what¶s your style?
what markets will you trade and why?
time management plan
entry criteria
exit criteria
money management
strategy monitoring plan
strategy adjustment plan
trading software/budget
what broker will you use and why?
deposits/withdrawals plan
can you support yourself?
starting balance
So let¶s talk about each of these aspects now 5 October 18, 2010 WHY AND HOW TO WRITE A TRADING PLAN? Chapter III: Why do you want to trade? It¶s important to state why exactly are your reasons to trade. Is it the money? Is it the
financial freedom? Why don¶t you start some other type of business instead? Or why not get a
job? In order to succeed, this must become a burning desire. That¶s why it¶s important to write
down your reasons for getting into this business and remember them every day. Here¶s an
example of what you might write in this section:
³I
want to trade because I want to be financially independent. I want to have
time to travel and spend time with my family, enjoy life and study everything that is
interesting to me, without having to work for someone else¶s wealth every day. I
hate routine, I hate having a boss, and trading would provide me with the
opportunity to free myself from the necessity of having a job to sustain myself and
my fa mily. It would also give me the comfort and free time to be able to travel all
around the world and see all the beautiful places I am dream ing to see.
Also, I like trading, because it is a continuous battle with myself, helping me
control and know myself better. It helps me deal with stressful situations easier and
become more calm and calculated. I really want to succeed in trading and
BELIEVE I will do so with all my heart!´
Now I hope you won¶t copy and paste this. You need to be honest with yourself and write
down your reasons. Make sure you believe in yourself and in achieving your goals. If you don¶t
believe in yourself, you might as well QUIT right now and stop losing your time.
6 October 18, 2010 WHY AND HOW TO WRITE A TRADING PLAN? Chapter IV: What is your edge? What separates you from all the losing traders out there? What are your biggest assets?
Why and how do you think you will be successful? What is your edge? This is what you need to
define here. If you do not know the answer to this question, your whole trading plan is
compromised. You need a trading strategy before writing down your plan. Here is an example of
what a trader could write here:
³I
am a very ambitious person and will not stop until I will achieve my goals.
I also learn from my mistakes fast and correct them. This will give me a huge
advantage over the majority. My trading edge is based on my custom coded
indicators, XYZ and QWE, that allow me to efficiently gauge the trend and
momentum of the financial instrument I am trading. Having this information, I will
always look for entry opportunities in the direction of the trend, along with the
momentum. This will drastically increase my winning rate, compared to traders
that trade against the trend or don¶t know how to gauge the trend correctly .´
It is not my job here to give you a specific edge or trading strategy, this is just a template.
If you are not familiar with technical analysis, you can check out my training camp website:
http://forextechnicalanalysis.successtasy.com
7 October 18, 2010 WHY AND HOW TO WRITE A TRADING PLAN? Chapter V: What are your weaknesses? We all know people aren¶t perfect. Knowing your weaknesses, being aware of them and
trying hard to correct them day by day is what makes a man/woman powerful. Again, here is a
short example of what you could write:
³I
am stubborn, unpatient, I get angry easily, I¶m sleepy, I find it hard to take
a loss, I want to get rich quick .´
This should be an exhaustive list of your weaknesses (emotional, intellectual or physical).
You will need to overcome or control them, if you want to succeed, but first:
K NO W Y OUR ENE M Y
8 October 18, 2010 WHY AND HOW TO WRITE A TRADING PLAN? Chapter VI: Weakness removal plan Ok, now you know your biggest weaknesses. What will you do to get rid of them? How
will you reprogram yourself to ditch these parasites that stop you from being successful? Here¶s a
template:
³I
am stubborn. Instead of following the market, I tend to be biased and keep
holding my view even after losing twice in a row. If I think the market will go short,
I keep selling. What I will do to stop this attitude is to take a 30 minute break after
a losing trade and read my trading plan all over again, to become aware of my
weaknesses. Being aware is the first step to fixing the problem.When I get back to
the computer screen, I will remember not to be stubborn and develop an unbiased
view of the market. I need to trade what I see, not what I think.
I am unpatient. I tend to stop waiting for the right setups and trade on
hunches. I here pledge that every time I trade based on a hunch I will punish myself
by throwing 5$ off the window I get angry easily. After I lose a trade, I am angry with myself and seek
revenge. Thus, I will respect my µstubborness¶ rule and take a 30 minute break
after each loss and read my trading plan. I will not start trading again unless I am
totally calm and relaxed.
I am sleepy. I watch TV at night, sleep late and wake up with a head ache. I
will start changing my lifestyle and go to bed earlier. Also, I will eat more fruits
and vegetables and less junk food, so I won¶t feel so tired all the ti me. Trading in
such a state is highly unlikely to yield anything positive.
I find it hard to take a loss. I will always use a 1% hard stop loss and if I get
angry when I get stopped out, I use the 30 minute break rule.
I want to get rich quick. I will read my trading plan three times a day to
make sure my subconscious mind finally understands that this attitude is wrong. I
will not quit my job or drop my business until I am absolutely sure I can sustain
myself from trading.´
Now it should be more clear to you why a trading plan is important. It helps you become
aware and a trader that is not aware will surely fail. We need to be aware at all times of our
mistakes and strive to fix them. Trading is also a spiritual journey, not only a money game.
9 October 18, 2010 WHY AND HOW TO WRITE A TRADING PLAN? Chapter VII: Time devoted to trading How much time will you devote to trading? State your devoted daily/weekly/monthly time: ³I am going to devote 4 hours per day, 5 days per week, 4 weeks per month,
12 months per year to trading!´
Chapter VIII: What͛s your style? Are you a day trader, swing trader or position trader? A day trader opens and closes a
trade on the same day, a swing trader keeps a trade open from one day to several weeks and a
position trader keeps trades from weeks upto years. Stress increases with day trading and
decreases in swing or position trading. This choice depends on your available time for trading,
but also on your personality or personal preference. Choose your comfort zone! Here¶s my take
on this one:
³I
am a day trader. This style of trading suits my personality and it has the
advantages of removing overnight exposure, offering more opportunities to profit
from and yielding profits faster. ´
Chapter IX: What markets will you trade and why? Are you only trading the Forex market? If yes, what pairs will you trade? Are you also
trading commodities, stocks, indices? If yes, write down exactly what financial instruments you
are planning to trade:
³I
only trade the currency markets and will only trade E URU S D for
starters.´
10 October 18, 2010 WHY AND HOW TO WRITE A TRADING PLAN? Chapter X: Time management plan We talked about your time devoted to trading. Now, we go into specifics, writing down
our daily and/or weekly and/or monthly trading schedule:
³I
am a day trader and I will adopt the same ti me schedule every day:
- prega me war m-up 8 AM: I will check out the economic calendar for
today¶s important news releases and/or read some morning reports;
- 8:30 AM: I will start looking at my E URU S D chart, from M1 to H1 then
down again, to see both the big picture and the micro view of the market;
- 8:45 AM: I will watch the price action for 1 hour to get a feel of the
market, and will paper trade if I see some good opportunities;
- 9:45: focus on trading for 2 hours;
- 12:00 PM: lunch ti me;
- 13:00 PM: I will analyze my trades, see where I went wrong, what I could
do better, make sure I have respected my trading plan. If not, punish
myself for not standing by my own rules (throw 5$ off the window, punch
myself in the nose etc -);
- 13:30 PM: read my trading plan again to let it sink into my mind;
- 14:00 PM: go out and have fun!´
Chapter XI: Entry criteria You must define your entry rules as mechanically as possible. This will allow you to
defeat your emotions and remove confusion when placing a trade.
³I
will filter all my entries using discretion, BUT these conditions are
absolutely necessary for me to enter a trade:
- Trend must be up, as deter mined by indicators XYZ and QWE to enter a
valid long. Trend must be down to enter a valid short;
- Momentum must be strong, as indicated by JGY and price above the 21
period MA for long or below for short;
11 October 18, 2010 WHY AND HOW TO WRITE A TRADING PLAN? - There must be at least 20 pips profit margin (space left until next
support/resistance obstacle);
- There musn¶t be any important news release in the next 30 minutes for me
to enter a trade.´
Chapter XII: Exit criteria Exits are even more important than entries. An optimal exit will make sure that you cut
your losses short and let your profits run:
³I
will exit my trade when:
- my reasons for entering the trade are not there anymore;
- my 15 pip trailing stop is hit;
- or stochastics is overbought and I a m long, or oversold and I am short. ´
Chapter XIII: Money management Capital preservation is one of the most important aspects you need to account for in
trading. No matter how much knowledge you have, you will have losing trades and/or losing
days/weeks. Knowing this, you must do whatever is necessary to make sure you stay in this
business in the long run. Don¶t bet everything on just one trade. Here¶s an example:
³I
will never risk more than 1% of my equity on a single trade. I will not risk
more than 3% or my account balance on all open trades. I will only enter trades
with a minimum risk:reward ratio of 1:1.´
If you¶ve broken one of those rules, let me ask you something: IN THE
REAL LI F E, WO ULD YO U EVER RIS K 5000$ TO HAVE TH E C HANC E O F
WINNING 4000$? That is what you are doing when you are not calculating your
risk:reward ratio before investing your money.
12 October 18, 2010 WHY AND HOW TO WRITE A TRADING PLAN? Chapter XIV: Strategy monitoring plan You need to watch your trading strategy over time and, if you don¶t reach your goals
using it, adjust it according to your experience. What can you do to make it perform better?
³ Every weekend,
I will review my strategy and see how it performed overall,
over the last month, and week. I will monitor the average loss per trade, average
win per trade, maximum drawdown, winning ratio and other statistics and see what
can be done to improve them, based on my observations this past week.´
Chapter XV: Strategy adjustment plan Yes, you need to have a clear plan for adjusting your strategy. Otherwise,
you will change it too often and fall into the mistake of ³running after Holy
Grails´. Here¶s an example of such a plan:
³I
will not make changes to my strategy more than once a month. This will
allow me to test it consistently, before changing anything, just because of some
temporary weak performance. F irst, I will check if my trading errors were really
caused by the trading strategy or by emotional behavior. Did I stand by the rules
on those lost trades? If not, remove those trades from the list and recalculate my
winning ratio. Is it still that bad? Then maybe there ¶s something I need to adjust in
my strategy. Am I taking bad entries? Or do I exit too early? Or too late? This is
how I will analyze my trading activity, objectively, and get better and better day by
day, week by week, month by month, year by year.´
13 October 18, 2010 WHY AND HOW TO WRITE A TRADING PLAN? Chapter XVI: Trading software/budget You need to choose a trading platform and/or trading tools, necessary equipment (laptop,
monitors, iPhone etc.) and your budget for these:
³I
will use a free demo of MetaTrader 4 platform for analyzing the market
and place my trade from my iPod Touch 4, using the fxTrade mobile platform. For
now, I am not putting up a budget for trading software. ´
Chapter XVII: What broker will you use and why? Choose your broker carefully, depending on his reputation, commissions, spreads,
execution, regulation, trading platform, minimum deposits, deposit/withdrawal fees etc:
³I
will use OANDA, because they have a tight spread on E URU S D, good
reputation, no commission, instant execution, one click trading platform, no
minimum deposits, low deposit/withdrawal fees.´
Chapter XVIII: Deposits/withdrawals plan This is where you state how often you will make deposits/withdrawals and what amounts
you will deposit/withdraw:
³I
will not deposit money regularly, however I will only withdraw 50% of my
profits each month and reinvest the other 50%, so that I can increase my lot size
and compound.´
14 October 18, 2010 WHY AND HOW TO WRITE A TRADING PLAN? Chapter XIX: Can you support yourself? This section is also important to clarify in your trading plan. Are you able to support
yourself from trading? Can you be a full time trader or not? This is also tied to the ³Time devoted
to trading´ section:
³I
do not support myself from trading, which is why I will not dedicate 8
hours per day to trading. I will quit my day ti me job once I am sure I am
consistently profitable and able to support myself from my trading profits.´
Chapter XX: Starting balance You will also specify what your starting balance will be, i.e. ³I
will start with a
balance of 100.000 U S D and will make this initial deposit by wire. ´
Conclusion By now, I think you have understood the importance of a well written trading plan. Not
only will it help tame your emotional side, but it will also give you the habit of lucidity. Planning,
organizing and executing your plan will be a very important lesson to learn in this life. This said,
I wish you a warm
H A PP Y T R A D I N G D A Y!
PS: For questions about this book or trading in general, don¶t hesitate to contact me personally on
[email protected]. Thank you
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