Developing A Trading Plan - Pt 4
Testing a trading Plan
Before they begin in the market, some traders find it helpful to 'paper
trade' the market for a while. This involves taking 'hypothetical' positions
in the market and then monitoring these to see what the outcome will be.
Before doing any physical futures trading at all, the first move is to start
by paper trading. A trading plan must be able to be measured. E.g. "I'll
risk no more than 2% of my capital on any given trade". It can't say "I
won't use too much of my equity for margin."
Traders whose systems are more technical in nature will 'back test' their
system against historical market data to determine the success of the system
in that particular market. A trading system can be as simple as a few rules
or as complex as a Black box technical analysis package. The key is that the
system matches your personal trading style. You can either create a system
from scratch or buy a readymade package. Either way it is advisable to test
the system with dummy trades before doing the real thing. Some experts
recommend 10 years of back testing with historical data (black box systems)
where as others recommend a shorter time span for the testing of a simpler
system. It is very important to perform your own testing on any 'off the
shelf' systems, and not rely purely on the seller's recommendations.
While all of these techniques are beneficial, prospective traders need to be
aware that simulated trading - no matter what its form, does have its
pitfalls.
Experienced traders will often say that there is no substitute for having
real money in the market. Depending upon traders own discipline, the way
they react in this circumstance could be very different compared to when the
trade was purely hypothetical. In addition, while a market's past
performance can provide some general clues as to its price behavior, there
is no guarantee that this will be repeated in the future.
Individuality
Trading plans are individualistic, based on such factors as personal
experience, education, risk capital and tolerance toward risk. For this
reason, trading plans may differ greatly from one trader to another. A
trading plan may work better with some people than others. Consequently, you
must develop a trading plan that works best for you. Among other things,
this requires patience, rigid adherence to the rules that you establish,
meticulous record keeping of trading performance (which provides valuable
feedback) and an open mind to try new methods. There are no guarantees of
profitability in the world of futures investing, but the discipline of a
trading plan goes a long way toward making you a successful futures trader.
Now let's look at some of the
SAMPLE TRADING PLAN (GENERAL SUMMARY OF MARKET ACTION)
Trading Philosophy / Trading Psychology:
I believe that Financial Markets are 100% psychology driven.Price patterns
are a reflection of the collective psychology of a large number of
traders.Trading psychology also a major factor in my own trading. It is
identified as my trading state. Fear and Greed are powerful enemies to
profitable trading and I can overcome this by training my subconscious mind
to be focused on following a defined trading plan versus focusing on wins
and losses.I am a disciplined trader committed to trading only for profit
strictly adhering too my trading rules, plan and standard operating
procedures.My style of trading is aggressive with my preference to trade
directional, and pattern set ups. I will trade full time as a day trader and
also seek other trading opportunities especially dealing with Options.I will
not have a bias as to where the market may or may not head, I will react to
the price, patterns and my tools as they present themselves applying my
trading rules.I trade what I see… Not what I think!I understand that I
cannot control the market, I can control only myself. My trading state and
mindset is the key to the success of trading. I must be rested, fit, healthy
and mentally alert. Accepting the stress of trading by keeping focused,
calm, disciplined and not distracted is essential for being a professional
trader.Losses are acceptable, not desirable but I can minimize them with
compliance to the rules, especially avoiding impulse trades and never being
in a trade without a plan or a stop.Trading is a business and I am here for
the profit.
Golden Trading Rules:
Check for Stops and targets resting in the Market then update or remove
them.Look left for previous structure.Always Set a Stop Loss.
Always!Maintain Discipline.Avoid impulse trading.
Trade with a plan and stand by the rules.Identify, Predict, Decide and
Execute (IPDE).Do not enter a market within 15 minutes after a news
event.Get S.E.T. (Stop, Entry, Targets) before every trade. (Know where and
how to Exit…)If I lose my ISP then call my Broker immediately and go flat,
then work on the technical challenges to get back online.Keep it simple.
Money Management, Risk Reward and Financial Goals:
I will trade 4 contracts as a unit maximum for the S&P e-mini.I will trade 3
contracts as a unit maximum in the Russell e-mini.For every $5K that I add
to my account I can add a contract to a unit. If I reduce my account by $2K
then I will reduce the contract size.Commissions, fees, charting services,
continuing education and other business related costs are considered
essential to trading.Risk to Reward is preferred a 2 to 1 ratio, but waiting
for the set up and trading the rules is paramount and given the opportunity
this standard is a guideline. My goal is to successfully net 9 combined
points per week in the market.My desire is to train for the FOREX so that I
can diversify looking for the best opportunities as I see them.
Daily Routine
I will only trade on days when I am well rested, relaxed and not mentally
distracted by matters that will divert my focus. I will spend at least 15
minutes relaxing to music or a form of meditation after a good nights rest
before trading.Conduct a Pre-Market Analysis myself, perform a top-down
review of the major markets and develop a plan of the day. The trading day
is from 9:30 a.m. (EST) to 4:15 p.m. divided into a morning session, lunch
and afternoon session.I do not trade for the first hour on Mondays.I do not
enter any new trades the last half an hour of the market hours (1545 - 1615
EST).After I have met my goal or the market is closed I will log my journal
and then spend quality time with my family.At some point before the end of
the day I will revisit the S&P trading day and back test my plan and system.
Pre-Market Analysis
Understanding that 70% of the volatility occurs during the first 2 ½ hours
of trading, this step is very important. The goal here is to recognize
probable entry or exit points.
Check for - and note important reports, events, and or news releases.
Include in the plan of the day candidates and times for probable heightened
price volatility.Look at Daily chart with ATR, 60 min and 13 min charts. Was
there expansion or contraction?Annotate the previous days high and close
with a black line.Determine Market Bias. Where is the price relative to the
Daily Pivot (Above the Daily Pivot is bullish bias, below the daily pivot is
bearish bias)Note overnight support / resistance levels, double tops/bottoms
and trends.Locate and note significant Swing Points.Where are the dynamics /
stops?Calculate the previous days Average True Range (ATR).Review the cash,
$OEX Globex and the DAX markets.Note the %ATR reached up until this
point.Review the charts of the top 10 stocks in the S&P.Top down analysis -
is underlying (Weekly)
(Daily) trend up, down or sideways? Is current trend with the underlying
trend, or against the underlying trend?Create a Plan of the Day (POD) and
Trade what I see with the POD outlining probable entries and exits.
Dailly Record Keeping
Every trade made during the day should be entered on a "Daily Trade Ticket".
This will allow ease in reviewing previous trades, noting errors that may
have been made in entry or exit setups and an audit trail of winners and
losers. The daily results will be tabulated each night, after market
closure, and entered on the Weekly Summary Sheet.
About The Author: Jason Brumbalow COO The Trading Authority
http://www.thetradingauthority.com
