T P R A DING LA N T EMPLAT E Disclaime r All reasonable steps and due diligence have been taken in preparing this document. However, it may contain ideas that are not appropriate to you or your style of trading, so do your own research and draw your own conclusions. By itself, this document will not enhance your trading performance, nor will it prevent you from incurring losses. Any losses that are incurred are the sole responsibility of each trader. Under no circumstances will trade2win or the contributors to the thread entitled ‘A Trading Plan – You MUST Have One!’ accept any liability for loss. PDF created with pdfFactory trial version www.pdffactory.com TRADING PLAN TEMPLATE WWW.TRADE 2WIN .COM C ONTENT S Introduction Pag e 3 T R A DIN G P LA N O V ERVIE W 1. What is a Trading Plan ? Pag e 4 2. Who Needs a Tradin g Plan ? Pag e 4 3. What Wi l l a Tra ding Pla n Do? Pag e 5 4. Before Yo u Start . . . Pag e 6 T R A DIN G P LA N T EMPLAT E 5. Kn ow Yours elf, Know Your Purpose Pag e 9 6. Tra din g Goals Pag e 11 7. Markets, Instruments & Timeframes Pag e 12 8. To ols of the Trade Pag e 13 9. Before the Market Opens . . . Pag e 14 1 0. Risk & Money Management Pag e 16 1 1. Exit Strateg y Pag e 21 1 2. Trade Strategies, Setups & Entrie s Pag e 22 1 3. After th e Market Close s . . . Pag e 24 1 4. Discipl ine! Pag e 25 1 5. Golden Trading Rules Pag e 26 T R A DIN G P LA N E XAMPLE S 1 6. Rol l Up, Roll Up . . . Pag e 29 PDF created with ‘pPLdANf FTHaE cTtRoADrEy trial -v eTRrAsDEio TnHE PwLAwNw.pd’ffactory.com PAGE 2 OF 29 TRADING PLAN TEMPLATE WWW.TRADE 2WIN .COM Introd uctio n Towards the end of 2004, a thread entitled ‘A Trading Plan – You MUST Have One!’ on the ‘Trading for a Living’ forum was started on www.trade2win.com (T2W). The purpose of the thread was to produce a template by which all traders - regardless of experience, instruments traded, timeframes and brokers etc. - could create a professional trading plan. This document is the result of that thread. It comprises two main sections with a third section that in time will, hopefully, contain examples of real plans created using the template. T RAD IN G P LA N O V ERVIE W The Trading Plan Overview addresses fundamental questions regarding the subject, starting with a simple definition. It then moves on to discuss why traders need a plan at all and, once they have created one, what it will do for them. Those traders who are already convinced of the merits of having a plan, please feel free to skip this section! T RAD IN G P LA N T EMPLAT E This section is the nuts and bolts of the whole document. It comprises ten key units, with a series of questions in each one: about 50 in total. This is rounded off with a final unit: ‘Golden Trading Rules’. The hope is that any trader can use the template to create their very own bespoke trading plan. Make no mistake, it will take time and effort to complete. But, having done so, you will at the very least, gain a greater insight into the kind of trader you are now and enable you to focus on the kind of trader you want to become. Explanatory notes and an outline for a possible answer accompany all the questions. For ease of navigation, there is reference number at the start of each paragraph. If you get stuck at any point, help is at hand from fellow T2W members. Just post your query with the relevant reference number on the thread: http://www.trade2win.com/boards/showthread.php?t=12585 Naturally, you can add elements to your own plan that you think are missing on the template and, conversely, delete elements from the template that you feel are not applicable to your plan. In order that other traders may benefit from your amendments, please post your ideas on the thread above. T RAD IN G P LA N E XAMPLE S Currently, this section contains no trading plan examples. In an ideal world, it would house at least three complete trading plans: one for index futures traders, one for forex traders and one for stocks traders. The icing on the cake would be if they also covered the three main timeframes: day trader, swing trader and position trader. PDF created with ‘pPLdANf FTHaE cTtRoADrEy trial -v eTRrAsDEio TnHE PwLAwNw.pd’ffactory.com PAGE 3 OF 29 TRADING PLAN TEMPLATE WWW.TRADE 2WIN .COM T R A DING P LA N O V ERVIE W 1. What is a Tradin g Plan ? 1.1 A trading plan is a complete set of rules that covers every aspect of your trading life. Many experts refer to the need to have an ‘edge’ which will tip the balance of probabilities of success in your favour. In itself, a plan is not an edge but, over time, the trader with a plan will fair a lot better than the trader without one. Many amateur traders do not have any sort of plan to trade by, and enter the markets with scant regard to their risk and profit objectives. Suffice to say, comprehensive risk and money management strategies lie at the heart of all good trading plans. 1.2 Traders with a plan have the ability to monitor their performance. They can evaluate their progress continually, day-by-day, in a way that is objective and comprehensive. This enables them to trade without emotion and with minimal stress. The trader without a plan is not able to do this and their trading tends to rely upon gut feeling, hunches and tips etc. Trading for them is a nail biting, emotional roller coaster ride of stress that, inevitably, results in financial loss. 1.3 Obviously, a plan does not guarantee success; that would be too simple. However, a good plan that is adhered to strictly will help to minimise losses and enable you to stay in the game a lot longer than traders who do not have a plan. 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”. 1.4 Some confusion exists over the difference between a trading plan (or system) and a trading strategy. As stated above, the former is a complete set of rules that governs every aspect of your trading life. It goes into great detail and may, for example, stipulate the amount of time devoted to reading threads on T2W! The term ‘trading strategy’ tends to be used to describe trade entry and exit criteria. However, these are merely elements of an overall trading plan and possibly not even the most important ones. It is perfectly feasible, desirable even, to include two or more trading strategies (i.e. entry and exit criteria) within an overall trading plan. 2. Wh o Ne eds a Tradin g Plan ? 2.1 Who needs a trading plan? Well, unless your nickname is any of the following: Mr. Charts, Naz, Newtron Bomb, Skimbleshanks or SOCRATES, - to name but a few, then PDF created with ‘pPLdANf FTHaE cTtRoADrEy trial -v eTRrAsDEio TnHE PwLAwNw.pd’ffactory.com PAGE 4 OF 29 TRADING PLAN TEMPLATE WWW.TRADE 2WIN .COM YOU need a trading plan! If your nickname is one of the above, you probably already have one and this document is not going to tell you anything you do not already know. 2.2 Some people have described a trading plan as a roadmap. It is quite literally the route that will take you from where you are now to where you want to be which, for most traders, is consistent profitability. In this analogy, consistent profitability is the destination. To embark on a car journey from John O’groat’s to Land’s End without a good roadmap would, probably, be unwise and the possible consequences of doing so are obvious. Similarly, to embark on trading without a clear idea of where you are going, and how you are going to get there, will almost certainly result in increased stress, sleepless nights and financial loss - or all three. The question you must ask yourself is this: if you would not dream of driving from the north of Scotland to the most southerly tip of England without a detailed roadmap, why on earth have you not got a detailed and clearly laid out trading plan? 3. What Wi l l a Tradin g Plan Do ? 3.1 A trading plan will make the act of trading simpler than it would be if you traded without one. It will limit your opportunity to make bad trades and it will prevent many psychological issues from taking root. It will help you to achieve these things because wherever you are on your trading journey, it will not only act as a roadmap, but also locate your position as well. Most importantly, if your trading is going badly, you will know it is down to one of only two possibilities: either something in the plan is not working or you are not adhering to the plan. If the plan is a good one and it is back tested and paper traded, (or forward tested with a very small amount of money) then the fault is likely to be found in the latter of the two options. But, what if you are losing money whilst trading without a plan? It is virtually impossible to distinguish what you are doing right from what you are doing wrong. You have no way to evaluate your results, therefore the likelihood of being able to diagnose the fault and correct it is small and could take forever. A trading plan is your personal GPS device to locate your position and, if you have made a wrong turn, it provides the means to identify where you went wrong and how to get back on track. You are able to evaluate continually your results and, more importantly - your discipline - in a manner that is objective and comprehensive. This is extremely difficult to do if you do not have a plan. 3.2 A trading plan should take away much of the decision making in the heat of the moment. Emotional issues will become very powerful when real money is on the line and, as likely as not, force you into making irrational decisions. With the correct trading plan, your every action should be spelled out, so that in the heat of the moment you do not have to make any decisions, you just follow what the trading plan stipulates. PDF created with ‘pPLdANf FTHaE cTtRoADrEy trial -v eTRrAsDEio TnHE PwLAwNw.pd’ffactory.com PAGE 5 OF 29 TRADING PLAN TEMPLATE WWW.TRADE 2WIN .COM 3.3 Okay, hopefully you are now totally sold on the merits of having a detailed and clearly laid out trading plan. Here is a summary of what the key benefits are: • Relaxed, stress free trading that is simpler with a plan than it is without one • Ability to monitor your progress, diagnose faults and amend the plan accordingly • A plan helps to prevent many psychological issues from taking root • A plan that is adhered to strictly will reduce the number of bad trades • A plan will help prevent irrational decisions in the heat of the moment • A plan enables you to control the only thing you can control - yourself • Professional traders are highly disciplined. A plan will instil a large measure of discipline into your trading. Gamblers tend to lack both discipline and a plan • A plan will enable you to trade outside your comfort zone. How many times have you let a loss run and cut a profit short because it was the comfortable thing to do? A plan, executed with discipline, will help to prevent this from happening • A plan is your roadmap which will enable you to get from wherever you are now to wherever you want to be – i.e. consistent profitability • The template (and, by implication, your plan) – is designed in such a way that if you do take a ‘wrong turn’ on your roadmap, you will know about it very quickly and have the opportunity to correct the problem before losses spiral out of control 4. Before Yo u Sta rt . . . 4.1 Before you start to create your own trading plan using the template, here are a few pointers to help ensure that you build the best plan possible. The template is broken down into eleven units. The objective of the exercise is to end up with a plan that is tailor made to suit your personality, ability and resources. Do not be tempted to skip any sections and be sure to work through them in the order that they appear. The order is specific for reasons that should become clear in due course. Think of the eleven units as links in a chain or as individual players in a football team; each one is as important as the other. For those of you who enjoy analogies such as these and wonder which unit best equates to the ‘goalie’, the answer is unit ten, ‘Risk & Money Management’. 4.2 Quite a few of the units may seem beguilingly simple. Although the template is designed to be as simple as possible, be sure to give careful consideration to all your answers. For example, the first unit poses the question, why do you want to be a trader? “To make money”, is a generic answer that is applicable to all traders. It is not personal to you and, therefore, it is not helpful to your plan. ‘Trading is a business, just like any other’, is a cliché PDF created with ‘pPLdANf FTHaE cTtRoADrEy trial -v eTRrAsDEio TnHE PwLAwNw.pd’ffactory.com PAGE 6 OF 29 TRADING PLAN TEMPLATE WWW.TRADE 2WIN .COM that is often quoted and one that is all too easy to forget. You might enjoy a cappuccino from time to time, but chances are that you would not dream of taking up a Starbucks franchise - so why become a trader? 4.3 In answer to the question in 4.2 above, it may be that you have seen pit traders in garish jackets on television and thought to yourself ‘I would just love to be that fired up and passionate about what I do’. If so, you may have a need for excitement. Ordinarily, such a desire is an admirable one but, in the markets, it could easily lead to catastrophe if allowed to go unchecked. Perhaps you have heard stories about traders making tens of thousands in a single day? Without doubt, some do; but they are only a small fraction of the mere 5% of traders who, so it is alleged, make any money at all in the markets. Crushing disappointment is often the reward for unbridled greed. Pie in the sky fantasies about trading via a laptop while aboard a luxury yacht sipping Champagne in the Bahamas are great fun, but they are hardly grounded in reality. Such fantasies may help to motivate you to study the markets, but the emotions that accompany them may not help you when it comes to trading the markets. Just as the trader with a lust for excitement is doomed to fail, the fate of a trader motivated by greed is almost certain to end in disaster. 4.4 Having these thoughts and emotions is not the problem; it is how you control them while you are trading that is the problem. Think very carefully about these questions and be brutally honest with yourself. Do not pretend to be someone you are not because you are embarrassed to commit pen to paper and admit that you are a thrill seeker chasing the Holy Grail of easy money. That is okay, after all, a good percentage of the 32,000+ members of T2W started out that way! In answering the question about why you want to be a trader, you will uncover the real motivations, fears and desires that fuel your ambition. Some of these will be helpful whilst trading, others not. How you allow them to impact your trading is what this document is, to a large extent, all about. To ensure that the impact is a profitable one, you must start by examining your real reasons for trading and, hopefully, learn more about yourself in the process. 4.5 Each unit comprises a series of questions (in bold Arial Narrow type, like this) followed by a few sentences (in Times New Roman body type, like this) to explain what the question is driving at. Then there is a basis for an answer (in small Arial italic type, like this) to provide further clarification. The latter is intended as a guide only and is not meant to constrain your thoughts and ideas in any way. 4.6 All your answers to the questions must be clear and succinct. There is no room for ambiguity in your plan; so avoid vague, fuzzy statements. Also, where possible, always define and qualify your statements. This usually means posing the questions - what, when, PDF created with ‘pPLdANf FTHaE cTtRoADrEy trial -v eTRrAsDEio TnHE PwLAwNw.pd’ffactory.com PAGE 7 OF 29 TRADING PLAN TEMPLATE WWW.TRADE 2WIN .COM where, why or how. For example, suppose you swing trade the Dow Jones 30 Index. Why the DOW and not the FTSE 100? Because you want to trade in the evenings after work? Okay, fair play. How will you ensure your success? Aha, you will start by writing a trading plan? Excellent! When will you write it? You get the general idea. Now, let us begin . . . PDF created with ‘pPLdANf FTHaE cTtRoADrEy trial -v eTRrAsDEio TnHE PwLAwNw.pd’ffactory.com PAGE 8 OF 29 TRADING PLAN TEMPLATE WWW.TRADE 2WIN .COM T R A DING P LA N T EMPLAT E 5. Kn o w Yo urs elf, Know Your Purpos e 5.1 Almost any professional trader will tell you that the key to success in the markets lies in understanding your own psyche. (Understanding the psyche of fellow traders, collectively referred to as ‘sentiment’, is also an invaluable tool). Many inexperienced traders are unprepared for the violent assault on their thoughts and emotions at the start of their careers. They soon find their heads spinning with euphoria when winning (greed) and the pits of their stomachs knotted with anxiety when losing (fear). Contrast this with many professional traders who, it is said, achieve a sort of trading nirvana, whereby their thoughts and emotions blend into a sea of calm regardless of whether they are winning or losing. Their heads do not spin and their stomachs do not churn – ever. For you to achieve this exalted state, you will need to know yourself and how you will react to both winning and losing positions. Once armed with this information, your trading plan can incorporate some of the positive aspects of your psychological make-up and filter out some of its negative aspects. 5.2 Coupled with understanding your own psyche is knowing why it is that you want to be a trader. What is your purpose - what does success as a trader mean to you? Decide what it is that you want to achieve and then ask why and how trading is going to provide it. How sad it would be if, after a year or more and hundreds if not thousands of pounds later, you realised that trading was not for you after all and that the ladder to success was leaning up against the wrong wall. Okay, here goes – your very own bespoke trading plan starts now. 5.3 Why do You Want to be a Trader? Question your true motivations. Examine whether your talents would be better suited to another business like the Starbucks franchise mentioned earlier. Are you certain that trading is the right business for you? If you believe that the markets exist for the sole purpose of showering you in vast quantities of easy money – then think again! Beware: it is NOT the easy option! I want to be a trader because . . . (I am excited by the challenge to be successful in a discipline that is notoriously difficult and where, allegedly, 90% of participants fail). My primary objective in wanting to be a trader is to . . . (generate sufficient annual income of £______ in order to support my family). My secondary objective is to . . . (spend more time with my family and enjoy the freedom of being able to trade from anywhere in the world). These objectives are important to me because . . . (they provide purpose and direction to my life and enable me to lead a more balanced one) .I believe I can achieve my objectives because . . . (my name is Larry Williams - say no more!) PDF created with ‘pPLdANf FTHaE cTtRoADrEy trial -v eTRrAsDEio TnHE PwLAwNw.pd’ffactory.com PAGE 9 OF 29 TRADING PLAN TEMPLATE WWW.TRADE 2WIN .COM 5.4 What Sort of Trader are You? Are you a discretionary trader or a mechanical one? Do you propose to trade in the long-term (i.e. months), medium-term (i.e. weeks) or short-term (i.e. days or, even, intra- day)? The choice of position trader, swing trader or day trader will, to a large extent, be determined by the amount of time you are able to devote to your business. Generally speaking, day traders remain glued to their monitors throughout the duration of every trade, whilst position traders may devote as little as one hour a week to the markets. Define your trading style and examine your beliefs about the markets. I am a discretionary trader and my style is very . . . (aggressive - which makes me suited to scalping intraday or, alternatively, conservative – which makes me suited to swing trading end of day (E.O.D.)). I understand that I cannot predict the future and I accept that I cannot control the markets. However I can control myself, which I will do by . . . (adhering strictly to my trading plan that is detailed, specific, tested and profitable). 5.5 What are Your Strengths and Weaknesses? List each of your trading strengths and weaknesses and then specify how you will maximise the benefit of the former and minimize the damage caused by the latter. This is often easier to do for other people than it is to do for yourself. Your background may provide some clues. Suppose you are an ex-fighter pilot who is used to working in a highly disciplined environment and adhering to a set of very strict procedures. (Potential strength). However, the flip side of the coin is that you may also have a need for fun, or an addiction to adrenalin pumping, nail biting excitement or, even, a subconscious desire to experience fear. (Potential weakness). If you are struggling to answer this question, try paper trading for a while and examine each trade, noting what you did right and what you did wrong. Do this until a pattern starts to emerge which should reveal your strengths and weaknesses. My primary strength is . . . (allowing my profits to run and closing trades in accordance with my exit strategy. This contributes to ‘my edge’ and helps me towards my goal of being consistently profitable in the markets). My secondary strength is . . . My primary weakness is . . . (wanting to recoup a loss quickly which, almost inevitably, results in increased losses). The following aspect of my trading plan will help to control this weakness and prevent losses from spiralling out of control . . . (I have a pre-defined daily stop. If it is hit, I stop trading for the day). My secondary weakness is . . . 5.6 Are You in the Right Frame of Mind to Trade? Your mindset is the key obstacle that lies between you and success in the markets. Have you slept well; are you fit, healthy and mentally alert? Are you calm and relaxed or are you tired and distracted by other events in your life? I will only trade on days when . . . (I am rested, relaxed and not distracted by work or family etc. I will be guided by my trading plan and I will adhere to it rigidly. It will help to prevent me from PDF created with ‘pPLdANf FTHaE cTtRoADrEy trial -v eTRrAsDEio TnHE PwLAwNw.pd’ffactory.com PAGE 10 OF 29