Trading Plan for Traders

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.

Amos Hostetter :Invaluable Trading Principles

  1. Try to find a long term trend and ride it up. Stay with the trend and don’t be tempted to grab a quick profit. Patience is one of the most important traits of a trend follower.
  2. Be careful not to be shaken out by market fluctuations. Instead try to sit tight as long as there are no warnings showing up. Prices that come back so that your initial gain halves are not necessarily a reason to sell.
  3. Big wins can only be achieved with major trends. Find them and don’t hesitate to buy at high prices when you may think it is too late. A market is never too high to buy or too low to sell.
  4. Necessary is of course a stop loss near the entry point. A stop is the easiest way to put your capital at work on a trend, because otherwise you are too often and too long stuck in a trading market which goes nowhere or worse in a falling market.
  5. Absolutely forbidden is averaging down or fighting the market trend.
  6. To think that a market is cheaper now after prices came down and therefore must offer a better chance than it did when prices were higher, will put you in the wrong stocks at the wrong times.
  7. Never try to sell at the top. The trend may continue. Sell after a reaction if there is no rally.
  8. On the other hand don’t expect the market to end in a blaze of glory. Look out for warnings.
  9. Tape reading can tell you only that something is wrong. Don’t try to analyze the flow of transactions as the tape shows them in too much detail.
  10. Don’t look for breaks. Look out for warnings.
  11. Pyramid stocks only if the initial investment shows a gain.
  12. Look out for normal market behavior. If a market doesn’t act right, don’t touch it.
  13. If in a bear market a complete demoralization develops suddenly it may be a sign for a starting bull market.
  14. Observation of the market gives the best tips of all. Follow your experience to exploit them, while sticking to facts only.

Lao Tzu: A Wise Trend Follower

“A good traveler has no fixed plan, and is not intent on arriving.”

“If you look to others for fulfillment, you will never be truly fulfilled.”

“When I let go of what I am, I become what I might be.”

“People in their handlings of affairs often fail when they are about to succeed. If one remains as careful at the end as he was at the beginning, there will be no failure.”

“Respond intelligently even to unintelligent treatment.”

“If you do not change direction, you may end up where you are heading.”

“The power of intuitive understanding will protect you from harm until the end of your days.”

“When you are content to be simply yourself and don’t compare or compete, everybody will respect you.”

Trend following..

Trendfollowing-The objective of the trend follower is to employ discipline to offset biases in order to extract signals from prices to the exclusion of other information. In fact, this has greater similarity to a statistical or engineering problem than to a finance problem. Because prices are surrounded by or filled with noise, trend following is a form of price smoothing. You eliminate the noise to obtain a clearer signal. It also can be thought of as a filtering problem. You throw out the excess information that may be associated with trades that are not driving the trend signal.

Trend Following Lessons from Jesse Livermore

Remember, you do not have to be in the market all the time.
Profits take care of themselves – losses never do.
The only time I really ever lost money was when I broke my own rules.
Throughout all my years of investing I’ve found that the big money was never made in the buying or the selling. The big money was made in the waiting. (more…)


Trader know thyself, know who you are, the trading method that fits your personality and risk tolerance and become a master of that method. Do not wander around when it gets tough, be faithful to your edge. Be the best that you can be at what you are whether you are a day trader, trend follower, option trader, momentum trader, chart reader, technical analyst, or fundamentalist. I know of traders that got reach with any of these methods but do not know any that got rich trading multiple methods.  Pick one, master one.

If You Have to Be Right, Trouble Ahead

“I confess, I think about the future. So do my colleagues. If someone who’s spent decades investing doesn’t have an opinion about what lies ahead, there’s something wrong. I believe our clients want us to apply the benefit of our experience in gauging and reacting to the opportunities and risks that lie ahead.
But I have a mantra on this subject, too: “It’s one thing to have an opinion; it’s something very different to assume it’s right and act on that assumption.” We have views on the future. And they can cause us to “lean” toward offense or defense. Just never so much that for the results to be good, our views have to be right.”
–Howard Marks, Oaktree Capital Management January 10, 2012

Marks is not a technical trend follower, but wise words about not worrying about being right.
The Dead saw it too:
Drivin’ that train
High on cocaine
Casey Jones you better
watch your speed
Trouble ahead
Trouble behind
and you know that notion
just crossed my mind

Trouble with you is
The trouble with me
Got two good eyes
but we still don’t see
Come round the bend
You know it’s the end
The fireman screams and
The engine just gleams

A Good Reminder

Trend follower Ken Tropin: In this business you need to have ample payoffs from your winning trades but make sure your losing trades do not generate big losses—so the returns have a fat right tail but not much left tail! Suppose over time you make money on half your trades and lose money on the other half. If the winning trades are double the size of the losing trades, then you have a pretty profitable investment.

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