BEFORE YOU BEGIN TRADING – “Plan your trade and trade your plan.”

Before you even consider trading it is important to take the time to seriously question your intentions in the market. Do you see futures as the means to a quick profit? Are you trading for excitement or a rush? Are you interested in trading because you seek satisfaction on a purely intellectual level? Do you see trading as a hobby or as an additional avenue of investment? Are you looking for a way to fund early retirement or do you see trading as an opportunity to augment your savings? Do you need the profits that trading might bring to cover debts or other financial commitments?

Many traders do not know why they want to be in the market. By taking the time to honestly evaluate your reasons for trading, not only will you learn more about yourself but you’ll also be forced to justify your commitment of hard earned capital to the market. Remember if your rationale is floored so too will be your trading. For those contemplating a career in Futures Trading, the following provides a useful list of issues that should be covered prior to entering the futures market and the pitfalls that all too often cut short the career of an aspiring futures trader.

2. Developing a written trading plan

When someone decides to start a business, the first task usually tackled is drafting a business plan. Most people would see this as mere common sense; however it seems the same logic does not apply to MOST new traders. Rather than planning how and where their capital is to be allocated, many new traders will launch headlong into a trading career with little regard as to their risk and profit objectives. By failing to have a trading plan, a trader will not know what to do when the market goes in their favor or worse still, when it moves against them. Without the structure that a trading plan provides, you will find yourself not only at the mercy of changing market conditions but also of your own conflicting emotions -a sure recipe for disaster.

Many surveys successful and experienced traders use a plan that is consistent with their temperament and the amount of money they have in their accounts. While a plan will not prevent losses, at least it provides you with some guidelines to follow. You can and should make minor adjustments to your initial trading plan throughout the trading period, but do not let the ups and downs of the market affect your overall game plan. Do not abandon your original objective, unless the market conditions that led you to place your trade change. The trading plan therefore imposes the disciplined structure that is essential for long term success.

A written trading plan helps keep you from making poorly conceived, spontaneous, thoughtless, emotional trades. An unwritten plan often gets changed when the trader’s mood changes. A written plan keeps you from many trading pitfalls such as greed, fear, boredom, a need to be right, a need to be a victim, and masochism. While a trading plan may contain many elements, at minimum it should at least contain the following characteristics:

1. Select your investment universe (ie. Futures market and the contract/s FX markets and contracts)

2. Appropriate account size (capital you can afford to lose. Allow for diversification). UNIT allocation based on the trading model

3. Define your style of trading (aggressive, medium , conservative)

4. Define your time frame (day / short / medium / long term trader)

5. Have specific ‘Rules Of Engagement’ (eg. DIV SOS 3)

6. Add risk management parameters stop loss (fixed dollar, trailing, swing)

7. Outline your money management

1. How much to risk – percentage based on capital

2. Percentage of money to risk on each trade

3. Where to place stops

4. When to add to a winning position

5. When to liquidate part / all of a losing position (Stop Placement)

6. When to liquidate part / all of a winning position (Profit Target 1,2,3)

7. Profit objective for trade / week / month / year (including MM)

8. Impact of commissions and fees on trades – individual and overall

– Slippage
– Continuing Education
– Subscriptions

9. Are you overtrading? (How many SIGNALS did your model generate this week? How many TRADES did you take?)

8. Back test the system as well as forward testing (referred to as paper trading)

9. Performance measurement (risk / reward ratio)

10. This will help you to determine your expectations (REASONABLE)

11. Determine your necessary requirements (resources to get the job done)

12. When should I start trading

13. Is trading for me?

A good trading plan is always complimented by a diary of your trading successes and mistakes. What you learn from your mistakes is more important. You paid for them; you may as well learn something from them, if you don’t remember them you are bound to repeat them. It often takes courage and cold hard unemotional judgment to stick with your trading plan.

Continued in Part 2….

Jason Brumbalow
http://www.articlesbase.com/advice-articles/developing-a-trading-plan-pt-1-82092.html

Posted February 7th, 2010 by admin 4 Comments » This entry was posted on Sunday, February 7th, 2010 at 9:00 pm and is filed under Futures Trading. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.