Plan Your Trade, Trade Your Plan
Plan Your Trade, Trade Your Plan
Often investing is seen as a maverick pastime – traders yelling at each other in the trading pits, investors calling up their broker yelling “Buy it all now!!” or “Sell everything!!”, making millions of dollars at the drop of a hat. This scenario looks great on the big screen and makes a good story, but the reality can be quite different.
The truth is that most of the greatest investors over history have had a very detailed plan that outlines their method. Warren Buffett had a detailed plan that made him millions before 1981 – then Charlie Munger gave him a better plan and it made him the billionaire he is today.
If you were building a house, wouldn’t you start with a blueprint? Or if you were building a business for that matter, wouldn’t you want a complete outline before you got that second mortgage to open your doors? It is the same with investing.
Your Roadmap To Trading Success
We know our destination – wealth, riches, retirement, philanthropy or whatever your dream may be. But what do we put in our roadmap to help us get there? There are 5 parts to a good trading plan, and all are equally important. Here they are:
1: Your Entry and Exit Signal/s
This involves mechanical entry and exit signals that you have back-tested and that have given you a high probability. Yes you can have more than one entry or exit signal. Combine them, mix them up, do whatever works. After all, markets do trend up and down, and different markets behave with different “personalities”.
2: Your Money Management
This involves how much of your total portfolio, as a percentage, you will risk on any given trade. Also, if you want to have a maximum amount of positions open at any one time, put it here. Ideally you will have tested your MM strategy and know exactly how much you could lose given a 20 trade losing streak. Also, we ideally use fixed fractional position sizing - but if you do have a better way then go for it.
3: Your Trade Management
This involves how you manage your trade. Where do you put your stop loss? Is it based on a percentage, or a chart pattern, or something else? Then – how do you move your stop loss to break even? Do you do it in two parts? Do you wait for two retracements or do it straight away?
4: Your Expectancy
At the end of the day it is important to know exactly where you stand, from an investor point of view. Including your back-tested expectancy for your market or stock will remind you that your method is profitable over the longer term. So when you have had 11 losers in a row and your confidence is lagging you can have faith in your method, instead of switching methods right before it comes good. Including your running expectancy will tell you where you’re at currently.
5: Your “Why”
This is my favorite part of the trading plan. Your “why” is the reason you are investing. To get your “why”, take a blank piece of paper and a pen and write everything that comes to mind about why you are investing. This is called “free-writing”, and you’ll find that after about the first 20 things on your list, you will start to get to the real gold of why you’re investing. It’s your motivation in the bad times, and with motivation comes results.
What Do I Do Once I Have My Plan?
Having a plan is great, and it’s tempting to get right in there and make some money. Before you do, if you do the following it will save you a lot of heartache:
- Back-test your plan through the last two recessions and -
- Use your plan live with ridiculously small amounts of money
Then you know that:
a) Your plan can handle the bad times as well as the good and -
b) By trading with small amounts of money you get used to pulling the trigger mechanically, using your trade management, and get an idea of your running live expectancy.
Plan your trade, trade your plan. A few simple steps can mean the difference between a -10% and a 30%+ return. And when your stock is tanking and you are losing thousands by the minute, you can react calmly and mechanically – you will know exactly what to do. Less worry and higher returns, just the way investing should be.
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June 21, 2009
Tags: Testing Posted in: Free Trading Course Lesson Backlog
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2 Responses
Hi Dave,
When I tried to access the following page: http://www.asxmarketwatch.com/category/how-to-enter-and-exit
I got a page not found.
Could you please send me a copy of this article?
Thanks,
Joe
Hi Joe,
Apologies! I will fix that right away. It was actually a link to 3 articles, all found in Module 2 of the trading and investment course – I’ll send you the individual links by email. Thanks for picking that up!
Dave
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