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Trading Plan By TrendFollower

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Introduction:

Disclaimer: This thread was inspired by Caseynotes' thread on the same topic. He actually posted his thread before mine but there were a few things missing in my opinion.

Many of you who follow me or read my posts will know that I have stated on many occasions in the past that one must have a 'Trading Plan', 'Trading Strategy' and a 'Trading System'. You will see this statement from me on many different threads and posts over the past couple of years. 

I am going use this thread to start a discussion on the 'Trading Plan'

Before one even starts to devise a trading plan they must have a passion, drive and enthusiasm for trading and prior to this for investing. My personal belief based on experience is that one must have a sound understanding of investing and ideally should have invested in the past. Ideally they are still investing now for the long term. This is the foundation that in my opinion is necessary. It must be like a religion for them. They must follow this religion daily and it has to be sort of like an obsession. Only then can one actually be motivated to spend the necessary time and effort that is required. 

One of the cheesy lines that is so true is, "Failing to Plan is a plan to fail".

The trading plan must be a document and that is in writing and not just in one's thoughts. A lot of traders think they have a trading plan and then you realise they think just having a trading style in their mind which they follow is the trading plan. Let me be very clear here. It is not. It must be a written document. 

Now IG have already posted on their main website details of how to create a successful trading plan. I am going to share the link with you below. Many of you will have seen this and if not then you can see it below. There is little point in just repeating what IG have already stated or merely regurgitating what is on the internet for all to see completely free of charge. 

How to create a successful trading plan

https://www.ig.com/uk/trading-strategies/how-to-create-a-successful-trading-plan-181210

What I want to try and do is add details and thoughts from my personal perspective to try and add some real value here. If people do not agree then that is fine and it is their choice. I will try and keep the audience in mind and those who read my threads and posts on the IG Community and keep it as simple as possible.

First Key Question:

The first key question is why you want to trade? The answer to this will lead you to start the trading plan by writing down the 'Aims and Objectives'. What are the aims and objectives behind the decision to trade? Now different websites and people will refer to this as 'Trading Goals'. Here you will clearly articulate what you are trying to or want to achieve. It is likely that it will refer to some form of financial goals as they generally do but on occasions it may not be about money if you are looking to fill your time during retirement. This beginning part is very important as it will shape your trading plan. 

To be continued...

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What needs to be considered within a trading plan:

One of the things that can be overlooked in a trading plan is what SKILLS you need to be able to execute your trading plan successfully.

  • Do you need to brush up on some mathematics? 
  • Do you need to improve your discipline?
  • Do you need to improve your mental strength?
  • Do you need to embrace the reading, research and analysis required?

There will be many other things of course and everyone will have something unique to them but you get the gist of it.

Also what other requirements are necessary for consideration during the journey of devising a trading plan?

  • Do you need to allocate specific time during the day for trading?
  • Do you have the trading capital necessary?
  • Is your family supportive of the commitment and time required?
  • Where will you actually trade? At home? In office? In bedroom?
  • Do you have to leave your job or can you do both? Could you consider trading in the mornings and evenings?
  • How much income are you looking to achieve from trading?
  • What sacrifices will you will be willing to make? You will have to make sacrifices, make no mistake. Will it be time with your family, relatives and friends? Will it be watching your favourite TV shows or films?

Of course there will be many other things to consider but the above will give you serious points to think about. 

There are so many different ways to devise a trading plan that it becomes apparent that there is no right or wrong way. The plan will be personal and specific to you. It will be unique to you. You have to devise a plan which has some value and can help you otherwise it is pointless. There is no point in devising a plan and then not sticking to it, referring back to it or even amending it as things change. 

If you do not have the sense and commitment to devise a trading plan then you can forget about having the sense and commitment required to be successful in trading. You will have days when you make losses and it is grim. You have to have the strength, discipline and commitment to get through such periods. If you cannot even be bothered and cannot understand the importance of having a trading plan then you simply cannot be considered a serious trader in my personal opinion. 

To be continued...

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 Very nicely outlined really appreciate the time you spend on explaining  but have a question. I heard about trading plan a lot but never configure what exactly it does mean. So let say if one tick all the boxes and have a plan have a bit of capital have a lot of motivation not only money wise but as things turn out on any given trading day also have time and know the basics of trading how one should create a successful strategy. Because most of the strategies are either not profitable or quite complex.

     Say for instance one is motivated happy to give it time as much it required also have a little bit of capital also get motivated by family too for the commitment and all the ingredients you mentioned except not a very crazy vast sort of experience in trading. How one get a profitable strategy like using of indicators which I find to be honest quite useless as indicators never predict future they just go with flow of trades and I think all of them have this commonality look at support or resistance macd volume Rsi Atr  but how to derive or predict future from those tools. Because more often you will find either one or another will let you down .Now as novice I find it a bit fasinating that news events usually works as catalyst but again understanding the affect of certain news on certain asset is a separate science.

      Again the reason I am asking might these very basic questions which you might laugh at me but want to clear my concept.

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@TrendFollower Thank you for sharing the infor, I appreciate it.

All the questions are relevant and it should motivate people to get their trading organized and thought through.

Overall I do have a trading plan and it fits my personality :)

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Posted (edited)

@nit2wynitI thought Id kindly share with you some good trading reminders posted here by @TrendFollower

Hope you will bank more profits in your trading journey :)

 

Edited by Excel09
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A lot of the news is literally made up to fit events.  You'll often see on Reuters that they will change a story multiple times throughout the day 'Oil rises as supply concerns outweigh demand' at 10am, then 'Oil falls as global growth slowdown fears outweigh supply' at 11am.

A big obstacle to overcome is knowing what news to listen to and what to ignore as jobsworth chattering.

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@dmedin,

Yes I agree. One must learn to ignore 'Market Noise' but have the ability to absorb the news that is true, relevant and important. It sounds easy but it is not always the case. 

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@MYK1,

I cannot speak for others but only comment based on myself. I conducted plenty of reading and research before I even traded a penny. My trading philosophy used trend following principles. I make losses as there are many times when there are false breakouts and my signals and indicators have been met for the trade to still go against me and my stop loss triggers and I make a small loss. This happens quite often but I accept it as part of my trading environment. 

My trading plan is built upon the premise to catch those big winners regardless of asset when they come. Most trading strategies will incur losses. In fact I am not aware of any that do not. 

In my opinion what you need to do is have a think about how you want to trade.

  • Which trading style you would like to adopt, which assets you would like to trade and why?
  • What are your aims and goals? Are they realistic and achievable based on your ability?
  • How are you going to trade these assets and why? Put these down on paper. Start testing different strategies to see which suits your personality and risk tolerance better.
  • Which are you able to execute based on your ability and understanding?

Trading is not easy. In fact it is extremely difficult. Trading without a plan is a plan to fail in trading. 

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At some point you have to 'anticipate' future price movements as that is in essence what trading is in my personal opinion. You are anticipating the future direction of the price to make a profit. I do not like using the word predicting as that is something none of us can do with any high degree of accuracy as otherwise we would be on a private island that we own. 

Now I tend to use the 'anticipation and then the testing of that anticipation via price action' model but there are many others which can be used. 

A lot of people use support and resistance but I think it is important which asset they are trading. If it is a wild and volatile asset which is extremely high risk, one must understand that support and resistance may not hold. One must also understand that a major breakout may not occur even if support and resistance has not held. In my view all there are is important price points and nothing more. There can be false breakouts and trend reversals at such price areas. This is what catches a lot of traders out. One of the indicators you could use is the momentum indicator to see if the move has the potential to become a strong trend. Also you could use support and resistance for potential trade entries and trade exits. You could use them when considering setting stop losses. 

I appreciate that many will not like the word but we are 'speculating'. There is nothing wrong with speculating. The aim is to make as much profit as possible and our trading plan must articulate how we intend to do this.

In my personal opinion trading in the direction of the trend will give you the best chance to profit. 

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As far as I am concerned having a trading strategy is vital but this can only be done if you have a trading plan. Having a trading strategy means that you will have a predefined set of rules that you must follow to enter or exit a trade. This makes it different from gambling as those who are gambling will not have a trading plan, will not have a trading strategy and will certainly not have a trading system. For me they are more gamblers than traders. 

If you have a trading plan then you it helps to build a solid foundation to start with. It is like building the foundation to a sky scraper. A trading plan will be different for everyone so you cannot simply copy someone else. The reason for this is because we will all have different personalities, different aims and objectives, different psychology, etc.

The trading plan is crucial and I cannot stress that enough. I know some of you may disagree with me and that is fine but have predetermined rules are paramount to becoming a successful and profitable trader in the long run. If you want to consistently make profits year after year then you needs a set of rules (which you can tweak and improve at any time) to ensure you know when you are going to enter a trade and when you are going to exit a trade. 

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If you were going to set up a new business and required capital from a financial institution such as a bank then would you not be required to have devised a 'business plan'?

If you were going to construct property on a land then would you not be required to have devised a 'construction plan'?

Therefore if you are going to use your hard earned money to trade the markets where the risk is so great that you could lose this hard earned capital then would you not devise a 'trading plan'?

I think some of you should have a think about the following:

  • Your own personal strengths and weaknesses (what are you current skills and what skills need acquiring?)
  • What are you realistic aims and objectives. What are your realistic trading goals?
  • EMOTIONAL MANAGEMENT - One must manage their emotions and not let them cloud their judgement in ignoring to trade the strongest trending assets because of personal ego of personal views. 

The markets are ruthless. They are not your friend. They will take your money if you do not have a sound risk management strategy. If you do not have a trading plan then you are unlikely to have a sound risk management strategy. This means you are more likely to lose your capital than to make profits consistently year after year.

I have been trading for many years now and the only reason why I have survived and can survive making losses throughout the year (I do make plenty of losses) is that my trading strategy and trading system allow me to trade the strongest trending assets and they more than make up for my numerous losses. This works for me and has worked for me over many years. I use a longer 'timeframe' and do not mess around with any timeframe less than '1 Hour'. I am comfortable making losses and I try and identify the strongest trending assets as early as possible.

Only by having a 'Trading Plan', 'Trading Strategy' and a 'Trading System' is this possible. If anyone can achieve trading success and achieve profits consistently year after year without these is either a lucky, a genius or quite simply the best trader this world has ever seen. 

 

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I work full time. Therefore I am not reliant on my investing or trading income. This is extremely important for those who are new to trading and are inexperienced at consistently making profits year after year.

Make sure you have a source of guaranteed income before giving trading a go. Leaving your job without having this is 'Trading Suicide' in my personal opinion. 

In relation to your trading plan and trading strategy:

KEEP IT SIMPLE

IT DOES NOT NEED TO BE COMPLEX

 

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You must know in advance of your trade:

  • What you entry price will be
  • What your exit price will be

You must plan for this otherwise it is not a trade but a gamble. The reason why I think this is because the trader should know their entry and exit price before they actually place the trade. The gambler would have absolutely no idea what their entry and exit price is going to be before they place the trade. 

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You must know which assets you are going to trade and this must be in your trading plan. Why you are going to trade certain assets must be articulated in your trading plan. Why you are not going to trade some assets must also clearly be explained in your trading plan. 

I come across a lot of new traders who have no idea what assets they want to trade or are going to trade. They do not even know what percentage of their total trading capital they will allocate to any given trade. As they have not even though about this their risk management is so flawed that it is insane. 

Any trader must seriously think about their capital allocation to each trade. How much capital are they willing to risk on each trade. This needs to be documented in their trading plan. There are so many traders who simply do not take the time to think about this. This is not something they can copy from other traders as it is individual to their wealth and risk tolerance. 

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There will still be many people (I cannot call them traders if they do not have a trading plan - for me they are more gamblers and speculators) that will not have a trading plan or believe there is no need for one as it does not help them. Of course my personal view would disagree with them. 

If I was a betting man then I would bet that the majority if not all of the successful and profitable traders will have a trading plan. 

It is well documents that trading has a high failure rate. This is because trading both successfully and profitably over a period of time is extremely difficult. I think there is a sound trading plan behind every successful and profitable trader. 

I think incorporated into the trading plan will be trading rules that the trader will follow with strict discipline. It will include robust risk management. There will be detail about capital protection as without capital you simply cannot trade. Sound risk management is not an option but a necessity. 

There must be trading goals which can be 'measured'. 

Having a 'trading edge' is a critical element in performing better than other traders. A trading edge can be many different things but one of them could be identifying the strongest trending assets at the earliest opportunity and trading them. Another edge could be that you have more knowledge and understanding of an asset and how it moves than other fellow traders. Having a trading edge will be personal to the individual trader based on their skills. 

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I cannot remember where I read this but if you are thinking of placing a trade but do not have an 'edge' for that specific trade then do not trade it. Now this is far more difficult than it seems. I am assuming that a lot of traders trade assets and situations without having an 'edge' for that particular set up. The edge could be a deep understanding of how the price reacts for that asset based on certain situations and potential trade set ups and having the ability to identify them or having the experience of patiently waiting for particular trading sets up's and only trading them. This all sounds easy but it is anything but as a lot of knowledge, experience, patience and discipline is required and a lot of traders just simply will not have this hence such a high failure rate in trading.

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If you have a robust trading plan then you are likely to ask less trading questions as you will have predefined rules for entry that determine your trade execution. 

One thing I assume (cannot prove this as do not have evidence but is more than likely) is that losing traders have one thing in common. This is that they do not have a trading plan. Something else I guess they will have in common is no or little risk management. 

Something else (this is from a Trend Following perspective) that is important is to try and trade all or as different markets as possible to try and give yourself the best chance to capture the trends. This will increase your odds and put probability in your favour in terms of trying to catch as many trends as possible. 

I personally work full time so I Trend Following suits me but you must pick a trading methodology that suits you personally. I use a 'daily' timeframe as it suits the amount of time I have available for trading. Plus my investing takes up more of my time than trading. Trading is only a small part of my overall investing and trading activity. I am an investor first and a trader second. Trend Following makes this possible for me. Pick a trading methodology that is realistic and achievable for you based on your skill set. Do not dabble in something you simply do not understand or appreciate. 

No trading plan for me means having no clue and just guessing or faffing around. In other words, gambling!

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Trading with Rules:

If you can incorporate trading rules which are robust and effective and have the discipline to follow them in your trading plan then in my personal judgement it increases the odds of succeeding and improves the probability of doing so. Of course it does not guarantee it but you all know this by now, right?

You can test this rules using 'backtesting' and 'forward testing'. The latter gets ignored by a lot of traders. The markets have no right to behave exactly as they did historically which is why conducting back testing alone is flawed in my opinion. It must be supported by forward testing. 

Once you have testing your rules then you can begin to apply them for real. You must adhere to them as otherwise pointless but do not be scared to amend them if the need arises or it becomes necessary. The more work you put in at the beginning the less likely you will need to chop and change them as that would then defeat the purpose of being disciplined to follow them. 

 

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Some of the most important factors in a trading plan (there are many) are:

  • Entry and Exit Rules
  • Risk Management

Two of the key ingredients required to execute a trading plan in my opinion are:

  • Patience
  • Discipline

Though these sound simple and obvious it is surprising how little importance is given to the above.

Do not be scared about being wrong. My trades incur losses. That is part of trading. Embrace and accept them. Some on the IG Community would think it is a crime if you enter a trade (not according to their opinions) or make losses. They assume if you make a loss that you must be making losses overall come the end of the year. Making losses is part of trading and any trader who cannot not discuss their losses or talk about their losing trades is in my opinion likely to be hiding something or not showing the true picture of their trading success / failure. 

I openly state that my trading style incurs lots of small losses. This is the price I have to pay to catch the big moves and the big trending assets as early as possible.

The more honest your trading plan is, the more realistic your trading plan is and the more achievable your trading plan is (based on your skill set) the more likely you are to succeed at trading.

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It is widely reported that one of the reasons why traders fail is because they do not have a trading plan. Yet why do traders still try and trade without one? Is it laziness? Is it because they do not have the time to write one? Is it because they do not know how to put one together?

If traders think they can trade both successfully and profitably without a trading plan then they must be the best traders this world has seen! Even the best traders in the world and those who have made millions have trading plans. That is one thing all the big winners have in common. 

If traders think they do not need one and there is little point, they are 'delusional', 'arrogant' and most likely to fail over the duration of their trading experience. 

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    • Thanks for that @ChrisN, I am aware of it and practice the complex retrace tracking myself too.  What I was referring to was that the classic A-B-C corrective wave has the entire correction below (or above) the previous turn in my approach. I do use the classic A-B-C (5-3-5 internal wave profile) and also the complex retrace with the 3-3-5 internals and that one can get pretty tricky.  There is also a version of this that can be 3-3-3.  I also use the A-E Triangle form (3-3-3-3-3) for continuation consolidations and I find it especially useful for ending channels, I had a perfect one to set up my recent Shorts on US large caps.  However in all classic retrace cases (A-B-CsI do not allow the wave B to eclipse the previous motive wave high.  I am aware that some EWT analysts do use this mechanism.  As a matter of simplicity I kind of reject the notion that a wave 3 (motive) top can be eclipsed by a wave B top in a retrace move.  It would seem to make more sense in the classic 1-5 that the wave 3 is the peak and the next major peak would be the wave 5 but only after the retrace is completed. This is all a matter of personal choice of course, for me creating a trading and analytical method from existing technical analysis methodologies is about selecting the aspects of several that fits your psychology and testing it to ensure it works well.  A key factor is understanding when it doesn't work, one example would be where one of the more exotic EWT retrace scenarios takes place.  So I am aware but I do not use it in my methodology. Naturally I agree with your assessment of the power of the tool-sets but like anything it requires extensive study, practice and failures to learn how to use it best within the context of ones own psychology.
    • So are other trading strategies that do not use EWT and Fibonacci retracements.  It is all down to success rate and then more importantly the profit amount. You can have a lower success rate but a higher profit amount than someone who has a higher success rate but lower profit amount.  Is there any data or credible source that proves that using EWT and Fibonacci in your trading strategy increases your chances of a successful trade or improves the odds and probability of you making more / higher profits than not using them? Is there any material that one can look at which demonstrates or proves that it is worth including in your trading strategy? I don’t mean books on EWT as that will have a positive bias towards EWT.  
    • Mercury, of course, how you label your wave counts is entirely up to you. Corrective waves (according to EWT) are in the following form: ZigZags, Flats (Regular & Expanded) & Triangles. Complicated corrections are usually a combination. A common one is a double Zig-Zag. Triangles can often found in wave 4 or B but never wave 2. Motive waves are usually pretty simple to spot even for a novice. The problem always occur with corrections in my experience. Knowing the substructure count is critical in that respect. ZigZag (5-3-5), Flat (3-3-5), Triangle (3-3-3-3-3). There is often an alternative count (although one will always be preferred) and only subsequent price action reveals which is correct. There are a few rules, but really not many, and some guidelines. With respect Mercury there is no rule nor guideline that I have ever seen that says "the move does not penetrate above the previous high" for a corrective wave!! For those that don't have the time nor inclination you can subscribe to various services. In the hands of an expert, when combined with Fibonacci ratios, trend lines and sentiment indicators it is, IMHO, a powerful tool. 
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