The Components of a trading plan:
1. Entering a trade: You must know clearly at what price you plan to enter your trade. Will it be a break through resistance, a bounce off support, or a specific price, or based on indicators? You need to be specific.
2. Exiting a trade: At what level will you know you are wrong? Loss of support, a price level, a trailing stop, or a stop loss? Know where you are getting out before you get in.
3. Stop placement: You must either have a mental stop, a stop loss entered, or a time stop alone, or a time stop with an indicator.
4. Position sizing: You determine how much you are willing to risk on any one trade before you decide how many shares to trade. How much you can risk will determine how much you can buy based on the equities price and volatility.
5. Money management parameters : Never risk more than 1% of your total capital on any one trade. (2% maximum for aggressive traders who can handle bigger draw downs.)
6. What to trade: Trade things you are comfortable with. Swing trading range bound stocks, trend trading growth stocks, or trend following commodities or currencies. Trade what you know.
7. Trading time frames: Choose your time frame, are you a day trader, position trader, swing trader, or long term trend follower? If you are a long term trend follower do not get shaken out of a position in the first day by taking profits or getting scared out, know your holding period and adjust your plan accordingly.
8. Back testing: Do not trade any method until you review charts over a few years to see how you would have done, or for the really savvy run software back testing on historical data for your system for as much as can be quantified. There are also precooked systems like CAN SLIM, The Turtles Trading System, and many Trend Following Systems that can be found online or purchased. You need to enter your trading knowing you have an edge.
9. Performance review: Keep a detailed record of your wins and losses with profits and losses. You need to be sure that your method is working in real trading, review this after each 20 trades. Also if you had any issues with discipline then learn from your mistakes or make needed adjustments to improve your system.
10. Risk vs. Reward: Enter high probability trades where you are risking $1 to make $3, or trade a system that wins big in the long term through trend following.
Archives of “holding period” tag
rssMastering Reward/Risk
Most traders ignore reward/risk ratios, hoping that luck will save them when things start to go bad.
This is probably the main reason so many of them are destined to fail. It’s really dumb when you think about it, because reward/risk is the easiest way to get a definable edge on the market house.
The reward/risk equation builds a safety net around your open positions. It’s designed to tell you how much can be won, or lost, on each trade you take. The secondary purpose is to remove emotion so you can focus squarely on the cold, hard numbers.
Let’s look at 15 ways that reward/risk will improve your trading performance.
1. Every setup carries a directional probability that reflects a specific pattern. Always execute positions in the highest-odds direction. Exit your trades when a price fails to respond according to your expectations.
2. Every setup has a price level that violates the pattern. Only take trades where price needs to move a short distance to hit this “risk target.” Look the other way and find the “reward target” at the next support or resistance level. Trade positions with the highest reward target to risk target ratios. (more…)
Recommendations
Books:
I highly recommend “Dark Pools” which is about how we’ve come to the point where trades are measured in picoseconds (a trillionth of a second) in order to remain competitive. Sounds boring, but it’s written in the same style as a Michael Lewis book and if you ever wanted to know how a guy with lizards running around in his server room helped narrow the average holding period for a stock from two years to twenty seconds, well this is the book for you.
I also read “Savages” and it’s prequel (probably not worth reading). This was before I knew Oliver Stone was doing the movie. A cross between Weeds and No Country For Old Men – really very entertaining fiction.
Other books I enjoyed the last six months: Ready Player One, Deer Hunting with Jesus, This Book Will Save Your Life, The George Martin series, Open City (about NYC), 1Q84, Horns: A Novel, The Fear Index, 11/22/63, Smonk, & The Digital Plague. (more…)
Long or Short Position
Do you need to long or short the market today? If you’re a day trader, forget this question and ignore this post. But if you’re a positional player, perhaps having a holding period of at least 5 sessions, the above question is necessary.
Let us ponder.
1. What are your chances of success (initiating a trade that will eventually turn into a satisfactory profit)? Since you’re going to hold for several sessions, possibly facing several opening gaps along the way, might as well establish a position that you’re going to sleep with. So, unless you get the price you’re comfortable with, stay aside. Particularly practical with long holidays.
2. Is this your original plan? Are you trading according to your overall strategy or purely intraday impulse? I don’t think its very difficult to tell the difference. If you trade base on intraday impulse, you get a little more excited than usual.
3. ‘I have been dormant for some time, and I seriously need to do something’. The degree of this itchiness varies according to individuals. If you come from a day trading background, you’ll have a tougher time adjusting. After all, the mindset of ‘If I don’t do anything, I am not going to make anything either’ is in every human’s mind. Think about it. Position trading involves much passiveness, so technically, after establishing a position, you are dormant in some way.
4. ‘I am sure this is a solid short term opportunity’. I think this is the mother of all trading sin. Of course, this does not apply to day traders. But if you’re now a positional trader, stay a positional trader. Learn to let go the small fish.