A Trading Plan, the best Trader's Weapon

My story is probably somewhat similar to yours. I follow the stock markets daily since 2008. That year I began investigating the stock trading world, due to the real estate crisis that ate part of my investment portfolio designed by bank "financial experts". As an engineer, I'm always interested in finance, so I took the decision to manage my savings by myself.

I started part-time, in a self-taught way, studying the bases of stock trading and options. First with basic books for dummies and then other more technical like those of Alexander Elder, Adam Grimes, or Bill Johnson, that helped me a lot. The years passed, the accumulated knowledge, the experience gained and the disappointments received were fine-tuning my trading style, but it was just that, a style, or a group of strategies, not really a plan.

One initial style was to search for "cheap" companies with potential based on their fundamentals, valuations, highlights, and then, using diverse technical indicators and scanners, decide the entry to buy. And I never cared about the exit. I did day and swing trades of big-mid-small cap stocks and pennies, play earnings and IPOs, the greedy buy-the-dip with cheap OTM call options, tried entries with "incredible" technical indicators, created stock scanners, trust in some trading "gurus" ideas, etc, many styles and ways, with gains and many losses, mainly trying to find my correct place in that world... 

My various styles didn't work on a regular basis as I wished. I needed to focus on what was most comfortable for me, simplifying the way I operate. So I continued studying and practicing, and finally understood that stock trading is a war against the big guys who have all the advantages, so I shouldn't be against it, just follow them. And so, step by step, I improve my psychology and my trading "style" in all aspects: I selected a specific market, I emphasized risk/reward, I used better time frames to define entries and exits, never trade without a fixed stop-loss, I improved my taking-profit and cut-loss methods, I chose fewer technical indicators and the key: I gave priority to technical analysis through the interpretation of Price Action. After a long road, my Trading Plan was generating itself... And so until today: I'm still trading part-time and continue studying, fixing errors, trying to improve my work building my trading plan with an edge

Education. Practice. Patience. Discipline. As learning a new skill. That's what retail trading is all about!

Photo taken from pexels.com

Create your own Trading Plan

Finally, a Trading Plan is just a neat guide of what to do, previously to open a position. A guide that should always be strictly executed without emotions. You will know where, when, how much, and why you will risk your money on a specific underlying. Discipline is everything. And understand that any plan is put together from the experience gained, not from reading a manual or an article like this. 
Take note of the following basic ideas in order to create a clean Trading Plan:

1. Emotions control

Is the fundamental weapon of every trader. There is a popular adage in Wall Street that says that "stock trading is 10% strategy, 30% risk management, and 60% psychology". As I'm an engineer, in the beginning, I underestimate this, but today I confirm that it is totally true: good control of emotions allows you to be calm during trading hours, or make profit-taking overcoming greed, or cut a loss without remorse, or be calm if you lost a FOMO rally, or don't explode if you have three or more consecutive bad trades, or respect your daily gain/loss target, or... (large list!).  And it's a fact: only the experience of years trading gives that control of our emotions.

2. Personal Goals

It's simple: forget you will be a millionaire in a year with a Ferrari in your garage like in the movies. Even less paying expensive courses with magic formulas, and info of unknown companies ready to explode... all bullshit. They wanna your money. If they have the formula for success, why do they need to teach courses? Think: the internet gives you all of that and more, for free. All you need is to search cautiously, analyze the info, and follow only reliable traders.

Understand that retail trading is like another work or business in which you generate your monthly income. Therefore, set your real goals, in terms of expected rate or earnings, whether monthly or quarterly better. Evaluate regularly so you make necessary adjustments.

3. Risk management

Basically, don't trade guided by emotions: you need to know when to not trade. Once your working capital and margin account has been defined, you must be clear about how much you will risk in each trade.  For example, the Elder's 6% Rule limits the risk in your account as a whole by stating you never expose over 6% of your account equity to the risk of loss. And its Position Size Rule states that you may never risk more than 2% of your account equity on any single trade. As it's only a suggestion, it's highly recommendable to not overcome those limits. Protect your account!

Finally, you establish your preferred risk in every trade through the position of your always present stop-loss, which defines your position size, risk/reward ratio, and maximum drawdown. To do this, in each trade, always define your risk/reward (for example an R/R=1:3 is ideal for stock trading and debit spreads). To do this, use a bracket or OCO order ("One Cancels Other"), which submits a simultaneous buy and sell order with a fixed profit-taking target and a stop-loss risk level.

4. Operating style

Experience will tell us under which operating style you feel most comfortable: as a swing trader, day trader, position trader, or with scalping. The ideal is to use a minimum of three timeframes for each case and always review them from top to bottom, since the most important levels (support, resistance, trendlines, and patterns) are obtained from the highest timeframes, and the lowest timeframes are used for the tactical or entry decision.  

My triple screen involves the most common timeframes (major, lower, operative) used by the average trader:

- Day trade: 5min - 15min - 1hour 
- Swing trade: 15min - 1 (or 4) hour - 1 day
- Position trade: 1 (or 4) hour - 1day - 1week
- Scalping: 1 to 5min.

Another important point is your trading schedule. Decide it according to your time, but remember that novices trade in the opening and pros at the closing hour. In my case, for swing or day-trading, I prefer 3-4 hours after the session begins with market trend and price levels well defined and with volatility usually more "calm". When doing scalping, I prefer just the opposite. And for a long-term position trade, the hour is irrelevant.

5. Choose a specific Instrument, Market and Type of Trading

For a successful trading plan, you need to decide, after trying them, which market instrument you feel more comfortable with. They are many: Equity (stocks, ETFs), Options, Futures, Forex, Penny Stocks, Cryptocurrencies. Generally, you stay in the place where you obtained the best results over time, but sometimes the macroeconomy or market environment decides it for you. In my case, I just trade equities and options spreads, and due to the current market environment, now I'm focusing on specific industries and sectors through ETFs, operating them cautiously in day/swing trades. And, as usual, I maintain my long-term portfolio with index ETFs and reliable strong stocks, repositioning and hedging them every month finishes, protecting it when the next (and inevitable) big market correction comes. 

Then establish the market conditions you prefer for trading. The markets are always trending or ranging, no more, generating in its price action, four typical trades, and basic traders based on the technical analysis, according to Wyckoff classic theory: 

- Trend Continuation: those traders who buy at pullbacks on rallies, the trend-traders.
- Trend Termination: traders seeking just for reversals, the contrarian traders that "buy the dips".
- Support/resistance holders: the range traders that trade the range and fail breakouts.
- Support/resistance breakout: at end of a range phase, or into it, trades played by the breakout traders.

Of course, there are more types of traders. In summary, there are "schools" of retail traders: fundamental/technical traders, long/short traders, noise or sentiment traders, price action/candlestick traders, breakout/range traders, reversal/trend traders, portfolio/swing/day traders, scalpers, quantitative traders... large list!  Neither is better than the other. Just study, try and decide where you feel more comfortable, so to focus on it. And according to this, set the rules for your strategy. As always, experience is the best advisor, especially at this point.

Finally, consider using a powerful trading platform. For example, Thinkorswim, from the recognized broker Ameritrade. They are many platforms around there, just review its features: market instruments traded, research and charting tools, online support, margin account commissions, etc. Also, check opinions about it from reliable traders.

6. Strategy for Entries and Exits

My trading work consists of searching for equity or ETF with a clear market structure formed, that matches any of Wyckoff's four market phases:  Accumulation, Mark-Up, Distribution, Mark-Down. If it's difficult to classify its price action inside any of these phases, then I simply avoid it. It's much reliable to find patterns, supports/resistance levels, entry/exit points in any of these phases, for a profitable trade.

I'm feeling fine working as a trend trader or breakout trader. For example, I use the following entry/exit strategies when trade breakouts, in any of the styles (day or swing trading, position, or scalping), only trading at my predefined levels, trendlines, and patterns, using Price Action Analysis on the stock, regardless of whether it's bullish or bearish:

- For entries: search for a breakout at a key area, at the end of a range, with Price Action basics and volume confirmation.
- For exits consider two ways: by a fixed risk/reward target or by profit-taking due to Price Action at an obvious support/resistance level, or (in day trading) by Volume Profile indicator signals.

Stops and Targets also need to be predetermined in your strategy, for example:

- Stop Loss: use always a stop-market order slightly below/above a support/resistance level plus a security gap, as the Average True Range. Sometimes I use the Parabolic SAR. Or just define the level price according to a predetermined percentage loss or by levels/trendlines generated by market structure. Or finally place it where, if it's triggered, invalidate my initial trading idea. 
Place a stop-loss sounds simple, but probably in one of the most crucial decisions, a trader needs to make. Riding the trend through trailing your stop-loss is difficult but profitable. Experience is all, here.

- Target: align a fixed level according to your default risk-reward number (usually 1 for a conservative trade, greater than 3 for an aggressive position). You decide if maintain the level or move it, always trailing the stop on gains, a good decision.

I Always consider that the price action interpretation decides my order execution, the entry and the exit, and never a technical indicator signal.

The last part of a successful strategy is done after the closing bell: record all your trades, all the details in an excel spreadsheet better, and learn from your errors.

7. Trading Tools

About technical indicators, the fewer, the better. Keep charts simple and clean, so you focus on the most important data: the price.  In my work, essential indicators in every timeframe chart are volume,  a trending one as moving averages (SMA50, 200SMA, and EMA50), and a momentum indicator like the RSI for overbought/oversold levels. Add the VWAP and Volume Profile for day trading and scalping. It's enough: the rest is all Price Action Analysis on predetermined levels.

Finally, a great tool: Twitter. Renowned traders and smart guys on technical analysis share there (for free) their trading ideas, charts, views, insights, and more. You don't need any news subscription service, because these amazing traders use them and filter out what needs to be known. The idea is to create your own "financial twitter" (Fintwit)  with intelligence: just follow these reliable traders, reviewing if their posts match with your plan, avoiding the pump-dumpers that are the majority in this trading world. In summary, avoid the harmful "noise" (that's the reason I leave Stocktwits). 

To complement your fintwit timeline, add some financial page for news and highlights (as investing.com) for your daily overall market strength and macro analysis, combining it with a real-time calendar of economic events (as econoday.com), for selecting the best stocks or ETFs according to the current economic environment.  In summary, be minimalist in your trading tools is my best advice.