Trading Rule #23 – The Trading Plan You’ll Actually Use

Hardly anyone has a trading plan. Partly, because they don’t know what one should look like. But it doesn’t really matter what it looks like, it matters what its purpose is.

In fact, when you look at it from a “what’s in it for me” perspective, I suggest you keep 2 documents in a folder to support your development as a trader:

A document covering what you’ve tried and investigated
A summary of your current ‘outlook’ or ‘perspective’ or ‘approach’

About 6 months into your trading career, you might get a feeling of Deja Vu - and you realize - “I’ve looked into this before”. I think what happens is you get so caught up in trying new things, you forget which things you tried.

So our first document, let’s call it “TradingResearch” - should contain the following information:

• Date
• What I tried
• How it went

That’s it - as silly as it sounds, this will help you in the future. In fact, it’ll actually help you in three ways:

• The process of documenting something helps it embed the concept in your head and understand it on a deeper level.
• It’ll help you to stop spending time looking at things you looked at before.
• You’ll see patterns across techniques, which will help you pass on techniques that have similar attributes.

How much to write? Well - that’s up to you. This document is for you, so put in as much or as little as you like. And yes, if you are German or Japanese and want to use a spreadsheet, that’s fine too.

The Trading Plan.

So what should the trading plan contain? Well, we should probably think about what it’s for or what benefits we can get from it.

• Writing it down makes it easier to spot inconsistencies in the trading plan, whether it’s actually achievable time-wise and helps you retain it in memory.
• Writing it down helps reduce “creep” - where you inadvertently forget a component.
• As you start, you’ll refer to this document as you trade.
• After a while, you will not need the trading plan - because using it every day will mean you’ll remember the whole thing. So it’s a kind of “self learning” tool
• It’ll prevent you from trying too many techniques.

The benefit then - is that it makes you easier to do what you actually want to do in the heat of the moment. That brings you to a state many traders never reach - “consistency”.

In terms of sections of the plan, again - it’s really up to you and your situation. For example, we could have a position sizing section - but what if you only trade 1 lot? Remember, this is just a simple document to keep YOU on track, not ME or anyone else. Here’s things to consider:

• General Rules Section:
  • Position Sizing
  • Entry/Exit criteria (obviously, there can be many sets of these)
  • Tools used to make decisions (charts, dom, indicators, news etc)
  • How you’ll find opportunities
  • How to assess volatility, so you can tweak your stops/size
  • What limits you’ll have to stop trading for the day
    • Windfall profit (stop on excessive profit)
    • Consecutive losing trades (mean your read/the market is off)
    • Total Loss for the day

• Trading Day Section (list of steps to execute)
  • Trading Hours
  • Find what’s “in play” today
  • Assess volatility
  • Trade
  • Post Trade Review

This doesn’t seem like much and it really isn’t. What I would like to emphasize is the “in play” part of it.

It’s 2 sections, the General Rules define how you’ll trade and the Trading Day section outlines how you will approach your day.

Most of our readers trade futures and probably didn’t spend time thinking much about how equities day traders operate. I started off trading equities and the biggest issue is the fact there’s 12,000 of them. And most aren’t that active each day. There’s big name stocks that are active every day - think Tesla, Google, Apple et al. But the best opportunities are on stocks in the news - general news (like a product recall) or scheduled news (like quarterly earnings announcements). So your day starts on sites like briefing.com to find out what’s in play. So, let’s say you pick 20 stocks - you pull them up, waiting for the open. Then you trade - many of the stocks will have moved in the pre-market session, some will take off and leave you behind and some you can trade. By 10:30am - you have NOTHING on your radar, so you subscribe to scanning service looking for movers, and find these scanning services are cool but by the time they flag the move and you get there, it’s done.

Phew - glad I got that out, frustrating times.

With Futures, you are trading macro-economics - agriculture, energy, equities, metals etc. You have a VERY limited amount of instruments. The news that impacts each futures instruments is well known - a product recall at Harley Davidson is a great buying opportunity for that stock but would not move an index future.

So, I would suggest that part of your prep is figuring out which market to trade, across a MUCH SMALLER universe of instruments. You can use a tool like Jigsaw’s Market Intelligence for this - a tool that analyzes the main 23 instruments - grouped by risk on (speculative) and risk off (defensive). The goal is to prevent you from sitting in front of a sluggish NQ all morning, when the action today is in Crude. The Jigsaw Market Intelligence does all of the analysis for you - and interprets it - so you don’t need to learn macro-economic relationships in order to benefit from them.

Anyway, the bottom line is that 2 small, easy to maintain documents - will save you time and keep you on track with what your plan REALLY says, rather than relying on a version in your head that’ll morph over time without you realizing it.

And if your rules are a bit loose like “positive news, look for aggressive selling” - you can still define them in a trading plan - this video explains how:

Traders absolutely do this. They start with one idea, forget one condition, add one extra exception, loosen one stop rule, then six weeks later they are “trading the same plan” except the plan has been quietly replaced by a raccoon in a trench coat.

Don’t be that trader.