Create Your Plan

Section 1:      The emotional aspects of your trading plan

The first step to creating your trading plan is to understand your own psychological makeup. If you ask any professional trader about this, they will almost all tell you that understanding your psychological makeup and how you will react to certain situations is one of the greatest keys to being successful. Many inexperienced traders experience what I call the “Psyche Slap” when they start trading real money and they are not ready for the emotions that come along with it. Many times, what they rehearsed over and over in their minds is not what they end up doing. Amateurs experience the highs of euphoria when winning (thinking they are invincible: greed) and the lows of anxiety and depression when losing (regretting everything they have done, questioning every trade: fear).

Professional traders on the other hand seem calm, cool, and collective even when things don’t seem to be going their way. This is called trading in the zone. If you want to trade in the zone you need to learn how you feel when you have a winning trade and when you have a losing trade. Once you know the feeling of each emotion you can deal with it, by overcoming it with what you have written in your trading plan.

Ok, now let’s begin helping you to create your very own trading plan.

1. Why do you want to be a trader?

Remember I told you above that your motivations to trade and become a trader really need to be examined. Is this really the business for you? Can you see yourself as a trader 5-7 years from now? As I have already mentioned trading is not easy. If you actually make it to the elite 5-10% of traders that actually make money it can be very profitable and very rewarding. So you really need to ask yourself, are your talents better used elsewhere? Here is an example from my own trading plan:

I want to be a trader because I enjoy the challenge and I like working from the comfort of my home and being close to my family. My main financial goal as a trader is to generate sufficient annual income of $200,000 in order to support my family and continue to enjoy the lifestyle we have become accustomed to. My second financial goal is to ­manage $100 million in private assets. These financial goals are important to me because I believe they are part of my purpose in life and they allow me the freedom that I desire. I believe I can achieve these goals because I am diligent in my studies and am able to stay disciplined and follow my rules. I have a good group of mentors and a supportive family that will help me achieve my goals and stand behind what I do. I am sufficiently capitalized.

2. What Kind of Trader are You?

There are really only three types of traders although there can be numerous mixes of the three. I have listed them below:

1. Discretionary Trader. This is a trader who makes all of their decisions based on incoming information that could change on a regular basis. For instance, a discretionary trader may change his entire trade analysis on one piece of news that comes out, and he decides to take profits early. In other words, you make your trading decisions based upon your own discretion.

2. Mechanical Trader. A mechanical trader is a trader who follows a certain set of rules and very rarely deviates from these rules. The Sniper FX system is about 95% mechanical in nature. Therefore, I am a mechanical trader. A mechanical trader however, still has to be at the chart and push the button when it is time to make a decision.

3. Black Box or Systems Trader. A systems trader is a trader who programs their strategy into an automated trading strategy that makes all of the decisions for them. It is very important for a systems trader to have a written trading plan as that will help them quantify their entire strategy on paper and begin to allow them to write the rules for their system.

The Mixes

Within these three categories of traders there are several mixes. For instance, do you propose to be a day trader (all positions closed at end of day), swing trader (positions may last two days to four weeks), position trader (positions on for months). Obviously, you have to weigh some issues before you make this decision. First of all, how much time can you devote to your trading? If you are a day trader you will have to be at your computer for a long period of time and almost every day in order to have long term success. Swing traders have the luxury of checking their charts 1-6 times a day. Position traders may only check their charts once a week.

There is also another mix as to which kind of trader you are. Are you an aggressive, moderate, or conservative risk taker? You may think that you are aggressive, but when you see your account fluctuate by 1-2% in a day you start to get knots in your stomach. This is a very important component to understand about your psychological makeup. Be honest with yourself here and you will add a few years to your life.  :-)

There are benefits to each one of these mixes, but which one realistically suits you? Here is my plan:

I am a mechanical trader and a systems trader and I am generally a moderate to moderate-conservative risk taker. This brings me to the conclusions that end of day trading best suits me. I do not like to day trade because I do not like to be glued to my computer screen all day long. My goal is to spend more time with my family and doing what I want to do when I want to do it. This also brings me to the conclusion that I like to program my strategies into automated systems that will allow me even more freedom. I do not try to predict the future with my trading system. Therefore, I seek to be a trend follower more than anything else. My goal is to be on the right side of the move, but if that doesn’t occur I am not bothered because I am consistently following my trading plan, that is proven and profitable.

3. What is your mental state when you sit down to trade?

This is extremely important and something that you need to ask yourself every time you sit down to make a trading decision. You also need to have a plan of action based upon your mental state. If you are tired (to the point where you cannot focus), hung over, sick or in pain, mentally stressed by life’s issues, or otherwise distracted, what will you do? Will you trade or will you take the day off?  Here is my plan of action.

I will only make trading decisions when I am well rested, relaxed and not otherwise distracted by outside factors. If I am not in the right state mentally (angry, frustrated, foggy or am feeling any other kind of negative emotion) I will not make a trading decision. If it is possible for me to step back and clear my thoughts and put all of my focus and energy on my trading plan then I will jump back in the game.

I will not trade if I feel the emotion of greed (I have to make money) or the emotion of fear (I have already lost and am trying to regain my losses). This is called rebound trading and I will not do it.

If I am sick, or just plain stressed out I will take the day off, recoup my energy and my focus and then jump back in the game. This is something that I am putting in my trading plan so that I strictly adhere to it. I have already had negative experiences when not following this regimen.

4. Realistically, How Much Money Are You Targeting?

Now let’s discuss the reason that we are all traders; money. We all want to make more money for many different reasons. Hopefully you have listed some of those reasons above already. But you always have to set realistic goals for yourself in this area and they need to be based on solid evidence that your trading system or techniques can actually produce those results (Back testing and forward testing, which we’ll discuss in later lessons). You also need to take into account your starting capital. In other words you may think you can take $10,000 and turn it into $1mm in 12 months. Is this possible? Yes. It has been done before but only by a handful of traders over the last 40 years. Is this a good goal to set? Probably not. If you are staring out with $10,000 earning $50-$100 a day on average would be doing very good. That would put you at around 10-20% a month uncompounded. This is achievable if you have a good system and you adhere to your system. The other question is how much are you willing to risk in order to get the kinds of returns you desire to achieve? Here is an example of a good plan:

My financial goal with my trading business is to make 100% a year on the capital that I have funded. This will give me an annual income of $200,000. I will achieve this without the drawdown of my account exceeding 30%. This will give me an average monthly income of $16,667, an average weekly income of $3,846, and an average daily (trading days) income of $769. My daily percentage target is 0.3%.

Now doesn’t a 0.3% target sound much more achievable and manageable versus a 100% a year target?  :-)

Stay tuned for the next lesson on building your trading plan…

To your trading success,

Cecil Robles

Want to use this article in your blog, newsletter or website? You can, as long as you include this complete blurb with it: Trader and CTA Cecil Robles reveals powerful insights like this and more for traders of all types at his website www.4xeducator.com. To learn how to really succeed in your trading business, register for his weekly market newsletter at www.4xeducator.com

Disclaimer
This document was prepared with a spirit of excellence and due diligence. However, the ideas contained within this document may not be suitable for your trading style. Trading is risky business, and while putting together a trading plan is good, it does not guarantee your success, nor will it prevent you from incurring losses. Losing is a part of trading. If you are not prepared to have losses, do not trade. Any losses that are incurred are the sole responsibility of each trader. Under no circumstances will I, 4xeducator.com or any other contributor to “The Most Necessary Document Ever For Traders of All Types” accept any liability for loss.

As I have stated may times in numerous videos and documents, a trading plan is absolutely necessary for every trader. It doesn’t matter if you trade Forex, Futures, Stocks, Options or all of the above. As the old saying goes, ‘when you fail to plan, you plan to fail’. Just like every good business has a good business plan, every trader should have a good trading plan.

Now, you may just be starting out and not familiar with all of the nuances that go into trading. Don’t worry, that is why I have written this guide; to help you get your trading plan put together in as little as 60-90 minutes.

You will also be seeing real examples of my own personal trading plan, which will go a long way in helping you put your unique trading plan together. I underlined the phrase, unique trading plan, in the last sentence because that is the first thing that you must know; every trading plan is unique to the individual. Let’s get started.

Trading Plan Basics

What is a Trading Plan?

The most basic definition that I can give you for a trading plan is this:  A complete and detailed set of rules and guidelines for every situation that you could possibly experience in the trenches of the market. Most amateur traders do not have a specific plan that they follow in their day to day trading decisions; and, as a result they achieve amateurish results. A trading plan isn’t a trading strategy; instead it is what will help you separate from the crowd. Instead of most traders, who blindly fumble through their trading career, you will have established your plan of action to do business with the markets. This business of trading includes a complete set of trading rules.

A good trading plan has four main components at its heart: 1. Strategy Rules 2. Risk Parameters/Money Management 3. Emotional Evaluation 4. Results Analysis.  We will discuss each of these components within the context of this document.

Traders with a plan have the ability to monitor their performance on a daily, weekly, monthly, and yearly basis. This allows a trader to see areas for improvement at a quick glance. By having a plan and following that plan, you will remove much of the emotional stress and strain that comes with trading. After all, trading can be an emotional roller coaster when you have not already pre-determined how you will react when a trade doesn’t go your way. If you are trading your plan a losing trade is nothing more than a part of the statistical average of winners and losers.

Now, like I stated in the disclaimer a plan does not guarantee success; just like a business plan does not guarantee the success of the business. Trading is one of the most competitive and unpredictable businesses on the planet. However, if you will follow your trading plan to a tee, you will minimize losses incurred by mistakes and you will have a plan when events occur that are outside of your control.  In his book, Trading Online, Alpesh B. Patel writes, “While a plan cannot predict the future, it can lay down how you react to the possible outcomes. This is why a plan is essential. It is a list of strategic responses to events beyond your control. You control the only thing you can control - yourself”.

Essentially a trading plan is a roadmap. A trading plan can lead to a destination of consistent profits. You wouldn’t just get in your car and start driving to Timbuktu without a road map. A specific set of turn by turn instructions. That is exactly what a trading plan is. A set of step by step, turn by turn instructions that encompasses what you will do in every market situation.

What Will It Do?

Below is a list of the common benefits to having a detailed written trading plan.

1.    It makes trading easier, more fun and, less stressful.

2.    It reduces bad trades because of mistakes and errors. Like a baseball player, has errors, traders can also make errors which can create huge losses.

3.    It can help what I call psychological heat to be reduced. When real money is on the line, emotions can run very high and very low within a matter of minutes. A plan that is followed will help you battle this.

4.    A trading plan gives you the ability to monitor your results, diagnose bad trades and good trades, and refine your overall trading system.

5.    A plan allows you to control yourself.

6.    A trading plan will allow you, even as an amateur, to operate more like a professional; and become highly disciplined.

7.    A trading plan will help you to cut losses short and let profits run.

8.    A trading plan, much like a voice activated GPS system will let you know if you took a wrong turn very quickly.

Keys to Using This Template Successfully

This template is designed to help you put together your own personalized trading plan, one that suites you as a trader and as a individual. There are many aspects that differentiate you as a unique trader and yet there are many aspects that group you into the broad category of traders. The first key is to be very honest with every question. Deciding to trade, like almost all decisions in life, is all about motives. So be brutally honest with yourself and really dig deep to find out the true motives behind every answer.

I am going to list a set of keys to making sure this experience is profitable for you.

1.    Simple plans almost always work better than complicated plans. Many of these steps are very simple. They are designed that way. Even if it seems overly simple, continue to go through the step.

2.    Dig deep and think about your answers for a while before you move forward.

3.    Be careful not to be unrealistic, and don’t give generic answers. Define and qualify your statements.

For example:  Suppose you are a Forex day trader that only trades the GBPJPY. You would need to ask:

a.    Why Forex?

b.    Why day trading as opposed to swing trading?

c.    Why the GBPJPY as opposed to the GBPUSD?

Maybe Forex because you need the flexibility of higher leverage and lower trade size.  Maybe swing trading because you don’t have enough time for day trading.  These are good reasons, but will they insure your success? Start with a trading plan. When will you write it? These are the kinds of questions that you need to ask yourself.

4.    Creating a trading plan is more about learning yourself than anything else. Go with the process.

We’ll begin in tomorrow’s lesson.

Best regards,
Cecil Robles

You may use this post in your own blog or newsletter as long as you include this little blurb: Cecil Robles is the president of www.4xeducator.com and Ethos Inc. 4xeducator.com provides high quality education and alternative investment solutions to retail and institutional traders. You can visit them at www.4xeducator.com

Disclaimer
This document was prepared with a spirit of excellence and due diligence. However, the ideas contained within this document may not be suitable for your trading style. Trading is risky business, and while putting together a trading plan is good, it does not guarantee your success, nor will it prevent you from incurring losses. Losing is a part of trading. If you are not prepared to have losses, do not trade. Any losses that are incurred are the sole responsibility of each trader. Under no circumstances will I, 4xeducator.com or any other contributor to “The Most Necessary Document Ever For Traders of All Types” accept any liability for loss.