It is said that 90% of traders lose money in markets, if you are reading this, it follows that you want to with 10% profit makers. This guide encapsulates my personal learning path towards professional trading.
Step 1: Getting started with your ‘Trading Plan’
‘Why’ am I trading?
When I recognized that trading is my calling (or in your case: way to earn your livelihood, full-time or part-time to say the least). Trading is most challenging professions. My background is business Analysis , so I lay great emphasis on “why’ am trading in the first place?
- Define your ‘investment goals’: Before you begin investing, define and write down your objectives. This will help you to develop your investment strategy.
Start with your current situation.
- Are you retired? (Yes/No)
- Do you have the ‘free time’ to learn?(Yes/No)
- What is your typical daily routine? (700 to 1800 hrs work, Monday thru Friday)
How much time per week do you currently spend looking at or managing your investments? (4 hours per week)
- What is the ideal time of day available for you to dedicate towards trading and investing? (7:00am to 8:00am)
- What is your experience level in the financial markets? ( I have some trading and investing experience)I have invested or traded in the following markets / investment vehicles: ( Mutual Funds, Stocks, TFSA)
- Please describe your decision-making process when evaluating an investment opportunity. (Value and growth investor, Buy low sell high or sell high buy low)
What is my Approach:
A very simplest trading style can be “to take advantage of short-term trends in the Equity market”, using the daily time-frame to scan for potential trades that will be held for few days or weeks.
- Breakouts: Breakouts are identified as (a) a key price level and then (b) buying or selling as the price breaks that pre-determined level. You have to develop this skill to understand an underlying concept to see if “price has enough force to break the level, and continue to move in that direction (upwards or downwards).
- Retracements (Pullbacks): When you are identifying direction for the price to move in, and price will continue moving in. The underlying concept is that “after each move in the expected direction, the price temporarily reverses” as traders get out of their positions and take their profits and new traders (novice) attempt to trade in the opposite direction. These pull backs offer better price to enter trade in the original direction, before the continuation of the move.
- Reversals: There are times the when markets tend to ‘range’ or move sideways with no clear direction. Then at key price levels ‘bounce is expected’ for a small opportunities.
- Momentum: Momentum is force and cause continuation of the move(trend). Do not look for price to pull back or break out from any specific price, but merely to start moving more or less in the direction of the prevailing trend.
- Position trading: Position trading big daddy of momentum strategy, objective is to get in the the market when the price make a move. Traders build a position(i.e. holding a stock for more than a day or more).
What are your Goals?
- Your specific financial goal (examples): Retirement funds
Generate extra monthly income, My initial monthly total income goal 🙁 $5,000.00), My current monthly fixed expenses are ($3,000.00) I am able to dedicate ($1,000.00) to an initial trading account.
- Open a trading account: You can open a stock trading account with small sum of $1,000. Do your research on commissions and others aspects of trading like:-Minimum deposit,
-Loads of instruments to trade (Forex, commodities, indices)
-No platform fees,
-Many ways to fund your account (Wire, Direct deposit and transfers),
-Easy to use platforms,
-Lowest possible commissions on trades,
- Your specific financial goal (examples): Retirement funds
Monthly – To never let a ‘planned’ opportunity pass. To follow my trading plan without reservation. To hit “singles & doubles”, knowing that “home-runs” will come over time. Above all else, I will be consistent!
Yearly – To steadily increase my risk amount when my data tells me it is advisable to do so. To continue learning through my day-to-day activities of being in the market and through continued education. To keep trading business expenses to a minimum. To see a steadily rising equity curve!
Long Term – To trade for life! I would like to have multiple accounts; One for Income, via Day trading and one for Wealth, via Swing trading. This will allow me to eventually build up a retirement account where I can trade within a Roth 401K Plan.
What are my Objectives:
Being a trend-trader, I will seek to attain no less than a 50% win percentage, with an overall Profit Ratio of no less than 1.5.
What Markets will I trade:
My focus will remain on the Equity markets, but I will look to duplicate successes in other market arenas when my time allows for greater trade frequency.
What Time-frames will I trade:
Daily setups (only) during my initial trading phase.
- Consider your timeline:
|Time Frame||Holding Period|
|Position Trading||Long Term||Months to years|
|Swing Trading||Short Term||Days to weeks|
|Day Trading||Short term||Day only|
What Setups will I trade:
I will scan for the following two “trend” setups: 1) Basing/Breakout near 20ma, 2) Pullback to Minor Support or a rising 20ma.
All orders will be limit orders at the Ask price once a trade confirmation has been achieved. If my full share lot was not executed, I will seek to add liquidity by buying the remaining shares at the currently displayed bid price.
Where will I place my Stops:
My stop-loss prices will always be determined prior to entry, and will be at logical major-pivot locations on the chart that I’m trading from.
Exit take profit (and/or) trail-stop rules:
Half profit will be taken nearing a predetermined point of support/resistance, which must represent a 2:1 reward/risk ratio. Final profits will be taken after a confirmation of the end of the current trend (from chart of entry), unless ultimate target has been achieved first.
Risk Management rules:
My trade risk (1R) will be 1% of current (daily adjusted) trading capital. I will not have more than 4R at risk at any one time.
Pre-market activities, or routine:
Log in to trading platform. Review index charts for short-term bias. Use my chosen finance website to review earnings reports, and then log into Trade Ideas scanner for new trade opportunities. Load potential trades into Long and Short watch lists. Set alerts near entry points.
Post-market activities, or routine:
Update TJS Journal. Take screenshots of closed trades and hyperlink to its corresponding trade journal entry. Review all open trades for possible next day action. Review any closed trades to determine whether plan was followed (or not). Mark up SPY and Q’s chart for next day bias. Clean-up trading platform.
What Tools will I use for my trading business:
- Falcon Trading Computers – trading computer
- Super Trader Pro – charting platform
- Yahoo Finance, Trade Ideas – scanning software and opportunities
- Trading Journal , for trade Analysis and Record-keeping
Review the notes and screenshots of each trade 5-8 days after closure and after all biases and emotions have subsided. Write notes in the journal sections of the TJS as to how future trade executions, management and exits can be improved. Bi-weekly, check TJS Analysis sheet to see what sub-categories are producing positive expectancy (with frequency). Modify ‘plan’ according to updated information.
Read one new trading book a month from my selected group of trading (mentors / authors). Attend two seminars / conferences a year when/if my chosen trading (mentors / authors / educators) will be teaching or broadcasting.
Discipline & Mindset notes:
Be disciplined every day, and in every trade. I will abide by the (5) Fundamental Truths & “Trader” Mindset, from author Mark Douglas of “Trading in the Zone”.
- “Anything” can happen
- I don’t need to know what is going to happen next in order to make money.
- There is a random distribution between wins & losses for any given variable that defines an edge.
- An Edge is nothing more than an indication of a higher probability of one thing happening over another.
- Every moment in the market is unique.
My Golden Rules (and/or) Trading
- Always use “Protective Stop Loss” for every trade.
- Follow your ‘three Ps of trading’, Rules and system, don’t let your emotions do the trading.
3 PS OF PROFESSIONAL TRADING
Process Probability Profit (A)Start with charts for:1) Broad markets
2) Curve, Trend & Zones
(B)Search for stocks with momentum, liquidity and watch list norms.
(C) Use your charts to define your trade parameters.
Wait for higher probability trades.Use Odds Enhancers or other criteria to qualify your trades. Rules to qualify a trade:
1) Set a minimum score should be (75%) probability.
2) Strong directional trade.
3) What is overall trend? Is trend likely to continue, poised or reverse?
Return must be based on dollars at risk! Plan predefined risk and reward for asymmetric trade parameters. If your Risk to Rewards ratio (RRR) is 1 to 3, you only need 25% winning trades to be profitable!
On the other hand if profit ration to risk is one to one, then in this case you should have all of you trades winning, and that is insanely impossible!
Risk/Reward Ratio Win % Needed to be Profitable 1:1 100 % 1:2 50 % 1:3 25 %
- Don’t trade where disruptions are possible. T your own “self”,do’t be a copy cat by aping other traders’ trading.
- Do not over trade, If three losers in a row STOP Trading!
- Know the difference between gambling and trading.
- Stick to your daily loss limit, that is 2% of capital. Learn to love small losses for ‘learning from mistakes’ and ‘cost of trading’.
- Use small position sizes to begin with, then gradually earn your right to trade bigger.
- Trade your plan only, trade what you know.
- Do not add to losing trades. Cut your losses.
- Learn how not to lose money from a detailed Trading Journal. Keep it updated and act upon lesson learned line #6.
Step 4: Trading Psychology – The Secret of Professional Traders
Do not trade with emotion: ‘easier said than done’! Understand how our brains work. We are still carrying in us some defunct and very old instincts (automatic hardwired behaviors) force us to react under greed or fear.
Step 5: Analyzing Your trades and Adjusting Your Strategies and Styles
Step 6: Bankroll Management
Protect your account with money management, and make rule based trading to grow your account.