"Stick with your Trading Plan!": Identifying The Components Of Your Trading Plan

We’ve all heard that the best way to trade is to “Trade your plan”. Upon hearing this advice your next question may be “Okay, so what should my plan be?”.  

Well, there’s good news and bad news here. The good news is that you can make your own plan that suits your trading style. It’s less difficult to do this than you might think and the peace of mind that goes along with having a plan is well worth the effort.

 The bad news is that it’s going to take a bit of effort. There isn’t a one size fits all plan or a magic formula that just works. Everyone has their own plan, their own way of doing things, and their own risk tolerance. Someone who holds for years and doesn’t mind holding a loss for a month or more will not have the same plan as someone who scalps and is only willing to hold a loss for a few seconds.

  In order to build your own plan, you should take the time to analyze the trades that you have done well with. (You should also look at the trades that you don’t do so well with). Once you have identified the scenarios that brought you success, really think about the criteria that make up these scenarios. Whether you’re looking at volume and momentum, whether you’re looking for a particular technical pattern on a stock, or whether you’re looking purely at the fundamentals of the stock. Find the scenarios that work best for you and write out the components that make up those scenarios.

Identifying The Components Of Your Trading Plan

Time frame:    Are most of your winning trades held for a year? A month? A week? A day? Five minutes? Try to identify how long you usually hold a stock before you’re profitable and feel comfortable with what you’ve made.

Exit Plan:     When you enter a trade it’s a good idea to have some idea of where you would like to exit the trade and what you consider an acceptable loss to be if the price moves against you. Just remember that stop loss, trailing stops, and any other order that triggers a market sell order will not work pre or post-market.      

Volume:      Do you have more success with thinly traded stocks or high volume stocks? Many people find success with higher volume stocks, but there are also those who prefer a low volume.   

Float:    The float of a stock is the number of shares that are available to trade. Generally speaking the lower the float, the faster the price movement and vice versa.  

Technical indicators:      Are you succeeding more off of chart patterns, moving averages, and technical indicators than anything else? See if you can identify the patterns that you do well with. Odds are you may be able to use screeners to find those patterns as they form.

Fundamentals:    Do most of your winning trades have a higher EPS? Do they pay dividends and you happen to catch them right after the ex-dividend date? Is their PE ratio similar?

The Overall State Of The Market:     Do you perform better when the overall market is Bullish or Bearish? If your strategy is market dependent then you should work on creating separate plans for varying market conditions. A bullish plan, a bearish plan, and a neutral plan would be ideal.

Quantity:     The number of shares you trade can have a large impact on the liquidity of supply & demand. Not only impact your profit and losses but also on the stocks you can trade.

Spread:     The Bid/Ask spread can make a difference in your trading as well. You may find it significantly less stressful to trade a stock with a very tight bid/ask spread or you may prefer the opposite.

Your Mood And Environment:    For me, I like to trade with a well-lit room, quiet music in the background, my coffee next to me, a snack within easy reach, and having had a good night's sleep. I have learned the hard way that trading when I have not had a good night's rest is a recipe for disaster.

Once you’ve built your plan: Stick to it. If you find that you aren’t having success with your plan, look at the components of your strategy, and adjust accordingly. There is no “perfect strategy” for everyone. You need to find what works best for you.

Happy trading!

ClimberJon