This article will be dealing with an issue that I know you have all read about many times but probably don't want to think about. You know you need to do it but probably have not. I am talking about a written Business Plan, a written Trading Plan, a written rudder to your trading ship.
We all know trading can be fun and we all know trading can be boring but it is the stressful times that take its toll on us psychologically and financially. But a well written trading plan can reduce that stress, keep you focused and on track. Without one you are like a piece of driftwood floating down a raging river that thrashes around at the whims of any current that may come along. I wonder how many would invest in a company that didn't have a business plan - a written business plan that dictates direction and mission. Probably not many so why do so many traders think that they can run their business without one?
Studies show people with written goals tend to be more successful than those with goals but not written down; traders are no exception. Your trading plan is the rudder that steers your trading in times of uncertainty. It is also the yardstick by which you can measure your success, or lack thereof, as a trader. Following your trading rules keeps you disciplined, especially if you're tempted to trade too much or find yourself off on a tangent - like I do.
But there can be a huge chasm between knowing you need a business plan and actually writing it. Hopefully this article will bridge that chasm and give you a way to at least start.
One of the best ways to start a business plan is to answer some important questions. Questions about the kind of trading you want to do and the goals you want to achieve. This will force you to think about critical issues and tie up some loose ends that can derail anyone's trading. The answers to these questions should not be short one word answers they should give enough information that anyone who reads your business plan will get a good idea as to who you are and why you trade.
1. What is the underlying reason I trade?
This is probably the most important question you can ask yourself and don?t just answer "to make money." That is like asking why you breathe. Take a while to answer this question but above all be honest. For some it will be the excitement and for others - like me - it will be for the freedom to stay at home and not have the constraints of the corporate world. Think about this one a lot.
2. What Trading Vehicles do I Use?
Do you trade options, futures, stocks or only Exchanges Trades Funds? Why do you trade these vehicles? What advantages are there to each one and why did you pick this particular vehicle to trade? Do you trade long and short?
I trade futures intraday because of the quick execution and the liquidity but I also trade options for the leverage and the limited risk. I also trade long and short.
3. What Timeframe Do I Trade?
For me this one differs with the trading instrument. I trade futures on a 5 minute timeframe but options on a daily. Here you should also address if you hold overnight or not.
I do not hold futures overnight because of the risk but I have no problem holding options because of the limited risk.
4. Which Account Do I Use for the Different Trading Instruments?
If you trade futures or forex then you probably have a separate account from where you trade options, equities, ETF, etc. You may trade options in your IRA. Here you will list each account and why you trade the instrument within that account. This is place where you will also list the margin requirements each account has in relation to the vehicle traded.
I have an Interactive Brokers account for my futures daytrading so here is where I list IB's margin requirement for each of the futures I trade. I also have another account with a different broker that I use to trade options because IB does not allow selling options in an IRA and my main strategy in the IRA is calendar spreads.
5. What is My Money Management Plan?
Here you will list the risk you are willing to take with each trade, which in turn will determine the position size. You may need a money management plan for the each type of trading instrument you trade.
6. What do I Use to Enter a Trade and to Exit?
This is one of the most important parts of your trading plan and one of the most important to have written down. I used to have a tendency to jump from one service to another and try buying options with John Doe and then futures with Jane Smith and where did it leave me? You guessed it - with losses. If you use a service like OI then put that into your business plan and say something like, "I take the OI picks only when I see XYZ indicator give me a buy or sell to confirm." Or "I take OI picks without any other thought because they are so good at OI." Then when you run across John Doe's service and he says buy WYX option you will come back to your business plan and see that John Doe's service is not part of it. But what if you think John Doe's service looks pretty good? You have that contingency covered on question 11 - Under what circumstances do I modify this plan.
Get as specific as you can here and I assure you it will save you many headaches later on. Jumping from one strategy to another will be the death of your trading but honing your skills on one or two will put in a class that few traders reach.
7. What Kind of Records do I Need to Keep?
Do you keep all your trades on a spreadsheet or do you let you broker keep your records for you? What kind of profit/loss records do you keep? How do you determine your win/loss ratio? What do you need to keep for tax purposes?
8. What is my Morning Routine?
What do you look at to get a feel for the market in the morning? Do you take note of the overnight futures action? What news sources do you read? What economic reports are due today that could affect trading?
9. What is my Nightly Routine?
Are there any newsletters that you need to read to give me a synopsis of the day? Are there any stops that need to be adjusted? Are there any entries that need to be setup for tomorrow?
10. What are my Income goals?
What is your daily profit target? What is your monthly goal needed to reach your yearly goal? If you are not reaching these goals then what needs to change - the goals or your strategies? This is a tough one isn't it? Please see the next point on making changes.
11. Under What Circumstances do I Modify this Business Plan?
When do you make changes to this Business plan? Let's say you have specific rules on entry and exit and you find a service that looks pretty good. Do you just trade it and see how it works? Nope, you need to write down how you test this service to see if it is really as good as you think it will be - before you put any money on the line.
What if you are not reaching your goals? What changes or modifications to the business plan need to be done?
12. What is My Disaster Recovery Plan?
What do you do if your computer crashes? What do you do if your broker's platform crashes? What do you do if you have a power outage? You don't want to be answering these questions when they happen because if you are anything like me, this will be the time when your brain turns to mush.
If you have answered these questions fully and honestly, then most of the work is done. You can leave it like this or write it out in a longer more legal form, but whichever form you decide on it will be a legal agreement with yourself, and if you break this agreement then that says a whole lot about you - doesn't it? (How is that for a guilt trip?)
For those of you who already have a trading plan, do you refer to it often and follow it consistently? Why, or why not? Have you updated your plan over time?
Finally, keeping a trading log in conjunction with following your trading plan is a must if you want to improve your results. A well-documented log helps you review your good, as well as bad trades. You'll be able to see just how closely you're following your rules, and make the necessary adjustments.
Write your plan, stick to it, and watch the positive impact on your trading. You'll wonder why you didn't do it sooner
Remember trade your (business) plan.