Your Questions About Successful Trading Plans

Paul asks…

What does a good trading plan include?

John answers:

A good stock trading plan has a strict set of rules and actions which formulate your stock trading strategy and it defines when to buy and sell stocks and at what prices.

There is an old saying in business: “Fail to plan and you plan to fail.” It may sound
depressing, but those who are serious about being successful, including traders, should
follow these eight words as if they were written in stone. Ask any trader who makes money
on a consistent basis and they will tell you, “You have two choices: you can follow a
plan,ideally a written plan, or fail.”

If you have a written trading or investment plan, congratulations! You are in the
minority. While it is still no absolute guarantee of success, you have eliminated one
major roadblock. If your plan uses flawed techniques or lacks preparation, your success
won’t come immediately, but at least you are in a position to chart and modify your
course. By documenting the process, you learn what works and how to avoid repeating costly
mistakes.

So, what’s a trading plan anyway?

A stock trading plan is a strict set of rules and actions which formulate your stock
trading strategy. A stock trading plan defines when to buy and sell stocks and at what
prices. Every trade you make should be governed by your trading plan.

A plan should be written in stone while you are trading, but subject to re-evaluation once
the market has closed. It changes with market conditions and adjusts as the trader’s skill
level improves. Like the markets, a good trading plan evolves and changes, and should
improve over time.

Trading Plan Essentials

There are many essentials you should include in your business plan. These essentials lay
the foundation of your plan and will help you reach your goals. Here are 10 essentials
that every plan should include:

1. Are you ready? -Are you familiar with your trading platform and its resources? -Do you
know the current economical status and current trend we’re in? -Do you know proper money
management rules? -Do you have good equipment

2. Mental preparation -The most important part is to know your stuff well enough to teach
it -Even if you are knowledgeable, you need to follow your plan (yes this means you need
one…) -You need to be calm, focused, well rested, well nourished, free of distractions
and “in the zone”

3. Set your tolerance level -How much of your portfolio should you risk on any one trade?
Once again, follow your plan which should include such a possibility.

4. Set goals -Before you enter a trade, set realistic profit targets and risk/reward
ratios. Set weekly, monthly and annual profit goals in dollars or as a percentage of your
portfolio, and re-assess them regularly.

5. Trade preparation -Before the trading day, reboot your computer(s) to clear the
resident memory (RAM) -Identify the stock you want to follow -Refine your “buy list” -What
price are you willing to pay? -Does the stock have good volume? V -Using Technical
Analysis -Using Fundamental Analysis*

6. Do your homework -Before the market opens, what is going on around the world?

7. Set exit rules -Most traders make the mistake of concentrating 90% or more of their
efforts in looking for buy signals but pay very little attention to when and where to
exit.

8. Set entry rules -This comes after the tips for exit rules for a reason: exits are far
more important than entries.

9. Keep excellent records -All good traders are also good record keepers.

10. Perform a post-mortem -After each trading day, adding up the profit or loss is
secondary to knowing the why and how.

For a trader, the preparation means making your plan, developing your strategies, testing
your techniques, and continually refining it all. The opportunities are there for us to
take advantage of. We will only find success when our preparation intersects with our
opportunities.

Happy trading

Eric LeRiche
|| WARNING: Do Not Try to Invest In Stocks
|| Until You Get These 7 Secrets… FREE

George asks…

Good books on event planning?

I recently got a job as a Trade Show and PR Coordinator. I’d like to read up on it a little more. Besides on the job training, does anyone know of some good books on event or trade show planning? Thanks in advance for your help! 🙂

John answers:

Try some of these:

The Complete Guide to Successful Event Planning by Shannon Kilkenny (covers all sort s of events)

Event Planning : The Ultimate Guide to Successful Meetings, Corporate Events, Fundraising Galas, Conferences, Conventions, Incentives and Other Special Events by Judy Allen

How to Get the Most Out of Trade Shows by Steve Miller might be worth a look to show you what the exhibitors would expect and be looking for in a show– after all, you want THEM to be happy and consider it a successful show.
Also Trade Show & Event Marketing: Plan, Promote & Profit
by Ruth Stevens — again, it’s for the exhibitors, but it’s good for you to have some ideas of how to make the show work better for them.

There are also a couple of the Dummies books on PR and Event Planning that are okay.

Even if some of this is a no-brainer, it’s nice to have some things spelled out again. It’s all in the details.

Congratulations on the new job! Good luck with it!

Mark asks…

day trading with limit orders?

I had a question about day trading with limit orders…

I have been demo trading options for a while with a day trading strategy, it has been working out well but there is one part that will not be the same when going live and that is the orders will actually have to be filled instead of just being fake filled.

Now I usually trade the morning volatility in big stocks like AAPL, and everyone always says to use limit orders instead of market orders to get the best price.

Would limit orders or market orders be better in the volatile morning?
Wouldn’t I be left behind by the time my limit order goes through?
Should I raise my limit price a few ticks above the ask in order to account for price move? Or just put in a market order and hope for the best?

I’m very confused on the specifics of how this will play out in the long run, and I am sure that experience will make it very clear, but I just wanted to get some input from someone with a lot of experience before trying it for real.

Thanks
I am trading a breakout strategy, and I did already have that in mind.
Also, a couple of ticks won’t kill the strategy, but if I can figure out how to consistently keep a couple ticks every time then it will add up (throwing a couple dollars in the trash here or there doesn’t hurt, but why do it?)

thank you for your deep answer

John answers:

What is your time frame, strategy, and Trade Plan? It doesn’t appear you have one, and therefore have no basis for the later decisions.

If we are trading a range strategy in a trending market, the results can be disastrous, and potentially very costly. Often, it is better for us to try to trade a ranging strategy when markets are showing us range-bound behaviors. In your case, if the market is volatile and moving quickly, then we want to be trading a ‘breakout-related’ strategy.

Before we even begin to design the strategy, we first have to answer an important question:
What market condition do I want to design this strategy for?

As a beginner, you should be looking for the least volatility, not the most. Range trading is the easiest, trend following next, and breakouts and volatility is the race horse of trading (expert trading), where you are introduced to surprises you could never possibly fathom, for example, there is no way to avoid “false” breakouts and sharp reversals that seem to hunt your stops, only to return to previous prices/trends a few minutes later.

Ranges are highlighted by adherence to a ‘channel’ of prices. During ranging market conditions, prices will respect the boundaries of support and resistance, and it often behooves traders to employ the age-old mantra of ‘buy low, sell high.’ When going long, you are buying low and setting your stop just outside of the range with small risk.

Looking to enter trades in anticipation of the break of support or resistance is trading breakouts. Often, entry orders (pre-set orders to open trades when prices are hit) are the preferred method of trading breakouts. But you probably don’t see the problem here until you take a few large losses. When you are buying a breakout, where is your stop going to be? Below the range that it broke out from, for a huge risk. Even if price simply returns to the range, you’re looking at a large loss.

With range trading, you are buying low with low risk. With breakouts you are buying high with high risk. This doesn’t make much sense for most traders, no future in it unless you are an expert, and spells financial death for the beginner.

Increased activity often means larger and potentially more erratic price movements. And because these movements can be more erratic, it can greatly affect the trader’s ability to forecast price changes.

Trend traders will often wait for major levels of support or resistance to be broken so that a trend can be exhibited on the chart. Trend traders will then look to employ that same age-old mantra that range traders will employ of ‘buying low, selling high,’ only the trend trader is applying the ‘bias’ of a trend.

Several studies have shown that many traders are having trouble being successful because they are trading during the wrong time of day. “Get rich quick” is not a strategy.

To answer your question, if you are trading volatility and breakout methods, then price is running and you’ll just have to bite the bullet and get in with a market order, at least with half your position (maybe enter the other half on a pullback, if there is one). Like you said, you can either give them a couple of ticks on the limit order, or let them take a couple of ticks on a market order If your risk/reward is so small that a couple of ticks matters, then you need to re-define your strategy because you are trading way out of your league.

Another way to enter a breakout trade is to use a Buy-Stop Order. Even though this is the generally preferred method, this is very dangerous, because price can spike up momentarily and get you in, only to return back to a range, or reverse, and you have a horrible entry (the high) with huge risk again.

It’s pretty obvious that you aren’t anywhere near ready to Day Trade, especially volatility. But test the waters and jump right in there with the sharks; there’s hardly any pain, it’s over so fast, you probably won’t even know what hit you.

Hmm, I forgot you are trading options. Yet another level of complexity, and you don’t have an option evaluation program to show you the way, or even a remote chance of success against the experts. The breakout strategy I proposed is not for options. If you buy after a breakout, after option premium expands, you’re playing into the hands of the sharks and don’t even see them circling; you will only realize your mistake when you get blind-sided.

Lisa asks…

Has anyone got a stockmarket trading plan which delivers more winning than losing trades?

John answers:

I agree with Len — most successful traders have more winning trades than losing trades. 60% winners is the absolute minimum for a winning strategy — I try to trade only 70% or better. That means I trade less frequently, but my winning percentage is a little better.

It’s not so much how many winners you have, but the size of your losses. If you keep your losses small and have some decent wins then it’s possible to still be profitable. I’ve seen traders with a 40% win ratio that are extremely profitable because they have tremendous win size while keeping losses very small.

Steven asks…

Stocks & Day trading.?

Okay so i’m completely clueless about stocks… are there all the same stocks on the different online sites for trading stocks? like e-trade etc. also which site is most common. Do people make a living out of it like a good 100-200K Annual salary? How much do you need to start with if you’re planning on pursuing it seriously. Also what is day trading and how is it related. Please feel free to explain more and add additional info.

John answers:

First, if you are clueless about stocks, day trading is the last thing you should consider. That is like someone saying they are clueless about medicine and asking if they should consider a career in emergency room medicine since they hear you can make a lot of money.

Day trading is a strategy in which you buy and sell stocks during the day and close out all positions by the end of the day and make money on the volatility. Stocks are up and down all day. The idea is that you identify a trading range for certain stocks, buy when they fall into the low end of the range and sell when they get to the high end. There are many strategies, but you have to be on top of it minute by minute. If news comes out about a stock, your trading range will change and you will have to change your strategy for that stock quickly.

One of the ideas behind day trading is that news often comes out over night and if you close all your positions by the end of each day, you avoid the risk of overnight news.

However, there are two sides to every trade so for every body who makes a good trade, there is someone who makes a bad trade. This is a zero sum game. For every winner there is a loser.

How much you can make, depends on how good you are. You can make a lot or lose a lot depending on your skill. If you are clueless about stocks, you are likely to lose. Although some would argue that day trading is all luck anyway and if that is true, you might do as well as anyone.

Sometimes people make a lot of money over a period of time because they pick up on a trading pattern that persists for a period of time. However, it can end as quickly as it appears and you can lose a lot of money in a hurry.

You also need siginificant capital to make a living at this. How much capital depends on how successful you are and how aggressive a trader you are.

You do not make a “salary” unless someone hires you to day trade their money. Obviously no one is going to hire someone who is “clueless” about stocks to day trade their money for them.

Generally the same stocks are available at all online brokers. The only exception would be obscure exchanges and foreign exchanges some brokers may not participate in.

Since this strategy involves a lot of trading, you are going to have to pay very close attention to trading cost. For day trading, you may want to consder a deal that allows unlimited trading for a set fee.

If you go down this road, make sure you know what you are doing. Do a lot of research. This in not a game for beginners.

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