This is the continuing story of our two imaginary traders, Peter and Paul.
Peter may be a professional trader, Paul isn’t. Peter features a tested, proven, written trading plan that he follows whenever he enters a trade, Paul doesn’t.
Peter and Paul have had vastly different Stock trading experiences – Peter has just made another substantial profit – this point from the market, Paul has lost heavily.
A chance meeting with Peter’s group of friends at some point at lunch launches Paul on a learning curve which will see him become an honest trader, but not without some hard lessons along the way.
Today Peter shares his trading plan and therefore the importance of getting a trading plan with Paul.
“Today we’ll work on your Trading Plan,” Peter told Paul as they sat down for the beginning of their next weekly mentoring meeting.
Peter handed Paul a replica of Robert Miner’s book, Dynamic Trading, and said, “Here, read this section of this excellent trading book.” Paul read to himself quietly as Peter poured them both a cup of coffee.
“The purpose of Technical Analysis isn’t to be ready to accurately identify every market position, all of the time. While this might be the daydream of the many analysts and most amateur traders, it’s impossibility.
“Every method of technical analysis has its limitations and sometimes will provide contradictory information. Unless the analyst, trader or investor is willing to simply accept that his or her analysis will from time to time not provide a confident opinion of market position, he or she is doomed to failure.
“The objective of technical analysis is to spot those market conditions and therefore the specific trading strategies that have a high probability of success.
“If there’s a key concept related to trading and investing, it must be probability. All consistently profitable traders and investors know that each trading and investing decision only features a probability of success, never a certainty.
“Losses are inevitable and are even as much a neighborhood of successful trading as profits. If a trader features a successful trading plan, he or she should haven’t any more emotional response to a loss than to a win. Each is going to be inevitable.
“While it’s going to be difficult to take care of a totally non-emotional relationship to trading and investing, an understanding that trading may be a Business of probabilities will go an extended way towards developing a stable attitude towards the Business.
“All successful traders have an outlined, written trading plan. The trading plan can take many forms. At the very least, it’ll provide the minimum guidelines that have got to be satisfied before a trade are going to be considered. it’s going to be as complex as an extended set of very restrictive rules that has got to be satisfied before a trade are often considered.
“Each has its strengths and weaknesses. Neither method, whether rules or guidelines, guarantees success, but the shortage of either will ensure failure.
“Why have a trading plan and not follow it? Each guideline and rule must be included justifiably and purpose. All successful traders and investors consistently follow their trading plan and that they know that if they violate their trading plan it’ll always be costly within the end of the day.
“A trader who doesn’t consistently abide by his or her trading plan is doomed to failure.”
Paul checked out Peter after he finished reading, and understood the implications of what Robert Miner had written. He had never had any kind of trading plan. He had just taken the recommendation of people and purchased, held and hoped for the simplest.
Peter said, “You need a trading plan my friend if you’re ever getting to make money during this Business. Then you’ve got to possess the power to follow it.
“The paragraphs you’ve got just read are as important, and perhaps more so, than learning any method of study or trading strategies or methods.
“Even a trading plan that included technical analysis and trading strategies that were 100% accurate, in other words, would indeed predict the longer term trend of a Stock or Index whenever with perfect certainty, wouldn’t end in you making a profit if you are doing not know and act in accordance with the qualities discussed above.”
“With this in mind, I will be able to now share with you my trading philosophy, trading plan and rules.
“I have found having this set of guidelines gives me a high probability of creating successful, profitable trades. As Robert Miner said in his book, some losses are inevitable regardless of what rules or strategies are used. They’re a price of doing business.
“A Trading Plan and rules that you simply have tested and trust will assist you remove the 2 biggest enemies traders face – Fear and Greed. These two factors have probably cost more traders extra money than anything the market can throw at us.
“By writing down and consistently following a solid plan that you simply have back tested and proven to be profitable with you paper trading, you set yourself before 90% of market participants who fail to try to any research or testing before they risk their capital within the market, and are eventually exhausted or hand over because “the market just isn’t on behalf of me.”
“You must remember however,” Peter continued, “These are my guidelines. You would possibly feel comfortable with them otherwise you might not -you need to develop your own style.
“These rules also don’t constitute trading advice…you must sit down and determine what your rules and guidelines are getting to be. Use these…or not. You want to however decide which of the parameters you’re getting to use for your trading, then –
Write them down into an idea of action – and follow the plan.
Peter’s Trading Philosophy –
He went on, “My trading objective is to enter trades within the direction of the main trend using daily end of day data. There are three conditions under which I will be able to enter a trade –
When pattern, price and my mechanical filters indicate a trend reversal has taken place.
On the primary correction within the new trend, for instance, the primary goes higher low during a new uptrend.
On any trend continuation signal once the Stock or Index has signaled the new trend is underway.
“The initial trend reversal position will always be in many 2 Futures positions or $20,000 invested during a Stock. A trend continuation trade entry is going to be 2 or more futures positions and $10,000 invested during a Stock.
Stop loss orders are going to be placed 5-50 cents or points past the acute of the foremost recent swing pivot at the time the trade is placed – the amount of points or cents used depends of the Stock or Future being traded.
“These numbers are going to be different for each trader counting on risk tolerance and account size. Only combat the maximum amount as you’ll handle psychologically, otherwise you set yourself up for failure.
“If your position size is just too large, you’ll tend to leap out at the primary sign of trouble, often at the worst possible time. Trade within you temperature and success is far easier.
“My initial capital exposure never exceeds 5% of my available account equity. Additional positions won’t be taken unless the initial position is in profit and taking the extra position keeps the danger of the whole position below 5% of account equity. In other words, additional positions are only taken using the markets money.
Trading Rules and Trading Plan –
Peter continued as Paul took notes, “My Trading Plan and rules offer two sorts of trades – Trend Reversal entries and Trend Continuation entries.
“Trend Reversal entries are taken any time a Stock or Index completes a reaction and appears to be going into an Impulse Trend.
They are also taken when a transparent 5 Wave sequence has completed, as we will expect a minimum of a considerable correction, and possibly a change in trend at the top of a 5 Wave sequence.
The rules for Trend Reversal trades are –
The price must break a legitimate trend line.
The Moving Averages must cross, indicating a change within the short term trend.