As a spread trader, you understand that your core business in this context is trading. This means that you will need to develop a trading plan to base your business on. Save yourself time, money and stress by creating a blueprint of all the possibilities that can arise in trading, before you place a trade. Money is a powerful force, and you will need to create strategies to smooth out the emotional rollercoaster that trading can take you on.
Every successful business has a plan and the directors and owners managing it will be clear on the intended direction it will head toward in the future. An individual trader or investor in the financial markets should be no different. Taking the time to review past performance is another useful exercise to help, but by no means predict future performance, and it will assist in building an investing or trading road map.
The first step any business takes is to draw up a plan; remembering the old adage “by failing to prepare, you are preparing to fail”. When trading first starts, the equivalent of a corporate mission statement and a budget should be prepared. Such a plan is a good first step, but it needs to be reviewed and updated as trading continues and develops. All plans evolve and change, but if as a matter of course the progress is reviewed and strategy modified as needed on a weekly basis, a solid foundation will be in place to build a successful career in investing or trading.
The plan should revolve around your reasons for speculating and the level of annual returns that you are seeking as well as your appetite for risk and trading style. Once you have those clear in your mind, you are already well on the way to building the best trading system for you.
Creating a trading plan is a critical component of a long and successful spread bet record. It should include your profit goals, risk-tolerance level, methodology and evaluation criteria. Once you have a plan in place, make sure each position you consider falls within your plan’s parameters, as you are most rational before you place your trade and most irrational once your trade is live.
Choose overall rules to build your trading plan. Follow them to increase the probability of making money.
- Know what you can realistically expect.
- Let the market dictate your trading – you can’t dictate the market.
- Choose a trading plan premise that you believe in.
- Choose rules that fit your personality and lifestyle.
- You can’t follow all the rules all the time, or you would never make a trade.
- Some rules could also be called tactics.
- Keep it simple.
- Follow your rules.
- Manage your trading capital.
- Diversify your capital to reduce risk.
Learning from successful traders
Following trading experts is the fastest way to develop expertise in your own trading.
- Observe several successful traders.
- What actions and strategies do they have in common?
- What resources do they have?
- Who did they emulate and why?
- What are their most important lessons?
- How do they think and how do they communicate their beliefs and values?
- Mimic those qualities which will improve your trading ability.
Developing signals
When developing a signal it has to be based on a valid premise or theory about the market – such as the mechanics of how the markets work and an awareness of the psychological implications of certain patterns and indicators. You need to feel comfortable with the rules you choose.
- Have rules.
- Follow your rules.
- Develop rules on one set of data and test on a different set of data.
Entering a trade
A good entry system defines an objective that is repeatable for entering the markets. Develop rules that you believe will give the best outcome over the long haul.
- Know the expected value of the trade and the risk.
- Wait for indicators to give you a signal.
- When you have a signal, take it.
Setting the stop loss
A stop loss level is a point where you will exit when a trade turns against you. The primary function of a stop is to have a predetermined mechanical point at which you exit a trade. It provides psychological control. Have rules that will protect you, but that will not take you out of trades prematurely.
- Always know what the stop will be before you place an entry order.
- Use trailing stops if they fit within the parameters of your method.
- Use time stops as well as price stops.
Exiting a trade
It has been said of trading that it is when you exit a trade that you make money, not when you enter. Generally, it is your exit that will determine whether
you make or lose money on a particular trade. Exits can be an art rather than a science.
- Know how and when to exit if it is not mechanical.
- Do not let winning trades turn into losing trades.
- Develop a strategy for re-entry if a trade exit is premature.
Timing. I have found extra caution is needed at the opening, don’t ever trade before 8am unless big news is just out, try not to trade between 16,30pm-18.00pm New York heads out for lunch and volumes dry up. I made this mistake yesterday on AAPL. New York opens at 14.30pm but the real money hits the street from 14.50pm so just be aware.
Your exit strategy must be as well defined as your entry, it’s well known that I like to take part profits and attempt to run the remainder, this is just my strategy something I’m comfortable with; you must be equally as comfortable with your strategy.
Where to take the profit?
This is a good question. The method I now use with day trades is to trail the stop above the previous high or below the previous low. So the exit depends on the technical analysis in the time frame that I’m managing the trade in. Giving back too much profit was the biggest cause of my 2011 loss, particularly in some miners where I had become complacent after running a big profit from 2010. I’m probably not alone, after all why would we want to sell an asset if it’s performing so well, we’re supposed to be running our winners, and it’s never going back to our entry price from up here is it.
Since I’ve been day trading I’ve become far more defensive in my stock exits. As soon as the chart turns against me I’m out, and as soon as it’s in profit my stop is at breakeven. Most of my recent stock trades have been breakeven or a small profit. The problem I see with stock trading in this crap market is I can’t achieve 2xR profit because trades aren’t running. If we continually trade this market and take profit at 1xR we are taking no more than a 50/50 gamble. If we snatch a profit at less than 1xR we will lose in the long run as our winners will be smaller than our losers.
How tight a stop do you set and is it a physical or mental stop?
Generally a point or 2 below market makers. I widen stops first thing in the morning between 7.50 and 8am, to avoid spikes, and then tighten them later on. I always have a physical stop in place, if stock is “spiky” (like CPR) I will leave physical stop wide but would have tighter mental stop. I have stops looser on trades that have been running for a while, are in profit but still a way off target. I figure at that point I know the trade is heading in the right direction and don’t want to get stopped out on a market correction (unless market is very volatile in which case I keep with tight stops). Also if it is a smallish stock and gone up very fast, I will take profits along with everyone else.
Do we or don’t we listen to the news? I do but I often take trades that are contrary to what’s being said, JPM the other day announced a $4billion loss but it goes up; the news sounds bad but that was already in the public domain so it’s a long opportunity only if they had announced $6-8 billion or a much worse than expected results. News that’s percieved as bad but isn’t as bad as it could be will usually result in an up market and vice versa. There is an argument for not listening to any news just trading your signals that’s a decision you need to make.
Monitoring your trading plan
It is important to know what is going on in each trade and to be in a state of mind to see opportunities and take them.
- Choose rules that will keep you alert and ready to make the best move.
- Have a predetermined rule that will ward off problems and seek out solutions before any major losses occur.
- Evaluate the signals within a time frame consistent with a trading time frame.
Evaluating your trading plan
As a way of evaluating your plan, your objective should be to find the most appropriate trading plan for your values, belief structure and financial situation. You will need a set of data which is used for developing your rules, a test set of data to see how your system should perform in the future, and an out of- sample set of data which is for further testing just in case of contamination.
- If you do not believe it will make money it won’t.
- If you believe it will make money, it does not mean it will.
Some questions you need to ask as you build your trading plan
Your trading goal
- Your reason for trading, e.g. trading as an income generator; you want to be a famous trader.
Your availability
- How much time can you devote to trading?
- Do you still have a full-time job?
- Are you interested in monitoring the market even outside of trading hours?
Markets to trade
- Will you be trading UK markets only?
- Will you trade FX pairs?
- Will you trade US markets?
Your trading capital
- How much trading capital do you have?
- Is this money you can afford to lose?
- Where will you get your initial trading capital – is this your savings or are you borrowing to trade?
- How much profit do you expect to make from trading?
Risk management
- How much would you like to risk per trade?
- What would you do if you have a series of losses at the start?
Our trading set-up and tools
- What trading platform will you use?
- What hardware and software will you use?
- Will you be trading from home, the office or somewhere else?
- How will you protect your trading data?
Courtesy of CMC Markets
The main thing to realise is that short term trading is all about finding a system that works for you and puts probabilities on your side then discipline in sticking to the plan.
Here’s one trading plan as envisaged by a beginner trading enthusiast:
– Trade my main (candle reversal trade) on spreadbets for £1 per point to begin with.
– Every week I hit my target (50 points) I add another £1 per point (and vice versa) to a maximum of £20 per point (eventually!).
– Keep a maximum of £10k in spread betting account and whatever I make on top is my wage (I need to make at least £500 PW tax free though I have a few months to allow myself to get there).
– Keep a rigid record to help me optimise the current trade.
– Learn new trades (the plan is to wean myself into longer term trades (probably MACD based) as I realise watching 5 min charts all day is very intense!).
– Any savings I plan to put in my trading ISA for more long term equity trades.
