Smart Trading Plans

A Step-by-step guide to developing a business plan for trading the markets

Justine Pollard

• Publisher: Wiley
• Year: 2011
• Print ISBN: 9780731407866
• eBook ISBN: 9781742169170
• Edition: 1
• Topic: Business
• Subtopic: Finance
• Index: Business

Trading is a business and, and as with any business, those businesses who survive and thrive have a business plan in place. Smart Trading Plans guides readers through defining and documenting a trading plan which applies to their individual trading business. Smart Action Steps and example plan elements are included to guide readers through and illustrate the process of developing a plan.

Smart Trading Plans guides readers through the following:

• Creating a trading system
• Developing a trading routine
• Selecting the right trading tools
• Entries, exits and trade management
• Understanding risk and money management
• Developing a profitable mindset
• Strategies for trading

Complete with useful trading tips and bonus planning templates (available at www.smarttrading.com.au), Smart Trading Plans is essential reading for all savvy traders.

Part I

Your business of trading

Chapter 1

Trading is a business

The oft-quoted statistic is that 80 per cent of traders fail to make money in the markets. One of the reasons such a high percentage fail is because many traders do not have a plan — they trade the markets blindly with no focus and no clear guidelines. Trading is a business and in order for a business to survive, it must have a plan.

When you trade the markets, you are putting money at risk with the goal of achieving a profit, just like any small business. So you need to treat it like a business and have a plan that sets out how you are going to manage it. In essence, this is what this book is all about. It’s about teaching you to be a sound businessperson and the steps you need to take to develop your own personal trading plan.

A trading plan is very personal and individual. We are all different and what may suit one trader will not necessarily suit another. As a trader, you are totally responsible for your own decisions and actions in the market, so your plan needs to be unique. It needs to reflect your personal motivations for trading and be based on a method that suits your personality and lifestyle. This will be influenced by how much time you have to devote to trading and the amount of available capital you have to trade.

Develop a SMART trading plan

The only way you can be successful in the markets is to develop a trading plan that suits your personality. It is up to you to lay the foundations yourself and develop your plan to blend with your lifestyle and personality.

My goal is to guide you in developing your own personal SMART trading plan. When I say SMART, I mean that your plan must reflect the following key criteria. I will be covering these in more detail throughout the book.

Simple. Keep your plan simple —it is easy to get bogged down with too much information in trading and overcomplicate it with too many rules. I like the KISS method — ‘Keep It Simple Stupid’. For a technical trader, it should simply be about trading in the direction of the trend and exiting when the trend changes. But that is always easier said than done, because emotions often come into play and affect your trading decisions.

Mindset. You are the most important part of your trading. It is what goes on inside your head that will make or break you as a trader. You need to develop self-awareness and understand your motives for trading. Trading is not just about making money —money will flow from good trading.

Approach that suits your personality. Trading is about developing an approach that you are comfortable with that suits your personality and lifestyle. Your own personality influences the way you trade. Each person has a different psychological makeup and different reasons for wanting to trade the markets. If your approach does not reflect these things, it is unlikely that you will follow it.

Risk and money management. Managing your risk and money will be one of the keys to your success in the markets. You need to include information in your plan on how you will determine your position size, your capital allocation and stop-loss methods.

Trading system. This is the method you are going to use to trade. Your system will include the signals you will use to enter a trade, such as the set-up and trigger criteria and, most importantly, your exits.

How much capital do you need to get started?

I am often asked, ‘What is the minimum equity you need to trade?’ Obviously, the more money you have available, the better. But at the same time, you have to start somewhere and learn, even if it is a small amount. It’s best to start small first and see if you like trading before committing more money to it. A good starting point would be $10 000 to $20 000. With $10 000, you could take on four trades at $2500 each. Any amount lower than this would make the positions smaller and the brokerage costs proportionally larger. If you have a $20 000 account, you could take four trades at $5000 each, or five trades at $4000 each.

You need enough money to allow you to diversify in the market with at least four to five trades and ensure that brokerage costs don’t weigh on your account. Because trading is not a zero-sum game, the brokerage costs really add up on small accounts. The cheapest brokerage for share trading is a fixed cost of approximately $19.95 per trade for trades under $10 000. So to buy and sell, you are looking at a total of about $40 per trade. At $40 a trade, this would equate to 1.6 per cent of a $2500 trade. So you would require a share to rise by 1.6 per cent just to pay off the brokerage costs of the trade. The smaller the amount invested, the larger the rise you would require to pay for brokerage. This makes it harder to make a profit.

The next question I am often asked is, ‘Can I replace my income by trading?’ Once again, this depends on your capital base. You have to think of trading in percentage returns. If you are confident that you can make a 20 percent return on your capital, then you need to consider how much capital you would need to replace your income. For example, 20 per cent return on a $100 000 account would provide an income of $20 000 —would this be enough to replace your income? Probably not. But it gives you something to think about —you must be realistic about the return you can expect. I will be talking more about trading returns and objectives in chapter 4.

Smart action step

Be a sound businessperson. Make it your goal today to develop your own personal SMART trading plan. To get started, visit <www.smarttrading.com.au> to download your free Smart Trading Plan Template and focus on completing it as you read through this book.

Chapter 2

Trading psychology

All of the top traders I have met and read about say that psychology is the key to successful trading. I did not understand this until I started trading the markets full-time and had to come to terms with the emotional swings and internal dialogue you experience while in a trade. It took me some time to realise how important your mindset is in becoming a successful trader—in the end, this is what makes or breaks you in the markets.

I have learned more about myself since trading the markets full-time than in any other career I have undertaken. I can say now that it has been a wonderful journey of self-discovery and inner growth, but during the first year it definitely did not feel that way. I would like to share with you the psychological journey that I went through in my first year of full-time trading and the steps that I undertook in the following year to improve myself.

My trading journey

Before I started trading the markets full-time, I sat down and studied my motivations, set goals and determined what I thought to be my edge in the market. I knew that I was a highly organised, determined, motivated and goal-oriented person, so I felt that these characteristics would give me an edge in the market. However, I lacked patience and had a tendency to beat myself up after exiting a losing trade.

Patience was elusive. I was always afraid of missing opportunities and the need to be in the market was very overpowering. I found myself attracted to options trading. Everything seemed to happen very fast with options—in only a day or two you knew that your trade was a winner or a loser. The only problem was, I did very well in my first few months of options trading and started to focus on money rather than on good trading. This actually caused me to overtrade, which is not a very successful activity in the market. These are some of the issues I had to learn to deal with as part of my psychological development as a trader.

Once I realised that I was sabotaging myself in the markets, I knew that I had to take action to overcome my problems in order to move to the next level and become a peak performer in the markets. Below are the steps I undertook to get back on track and become the successful trader that I am today.

1. Get to know yourself

Continually work on improving your mindset.

You are the most important factor in your trading. You are the one who makes the decisions and you are the one who decides what happens once you open a trade. It is what goes on inside your head that will make or break you as a trader. You need to develop self-awareness and understand your motives for trading. Trading is not just about making money—it’s about becoming the best trader you can possibly be.

Start a trading diary.

Have a good look at yourself and your personality drivers. Understand how your personality influences the way you trade. Realise your strengths and weaknesses in the market and explore ways of overcoming your weaknesses. I recommend that you start a trading diary and write down your trading emotions each day as they occur and you recognise them. Writing down your thoughts and bad habits as they develop is like sitting back and watching yourself in a mirror. Once you have developed a list, look at the traits you have identified and determine how they might benefit or limit your trading. Think about how you might overcome your limitations.

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Table of contents

• Cover
• Contents
• Title
• Copyright
• Acknowledgements
• Foreword
• Introduction
• Part I: Your business of trading
• Part II: Trading plan: the foundations
• Part III: Trading plan: methodology
• Part IV: Trading plan: indicators
• Part V: Trading plan: risk management
• Part VI: Trading plan: system development
• Part VII: Trading plan: analysis and backup
• Part VIII: Review
• Appendix A: the trading plan
• Appendix B: resources
• Glossary
• Index