A Trading Plan, the best Trader's Weapon


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 I'm always interested in finance, I took the decision to manage my money 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 and 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 strategy, not really a plan.

This initial style was to search for "cheap" companies with potential based on their fundamentals, valuations, highlights, and then, using diverse technical indicators, decide the entry to buy. And I never cared about the exit. I did day and swing trades of big-mid-small cap stocks, pennies, play earnings and IPOs, buy-the-dip with cheap OTM call options, tried entries with "incredible" technical indicators, created stock scanners, etc, many styles and ways, with gains and 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 trading work. Education. Practice. Patience. Psychology. That's what it 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, how, 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 steps 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 stock 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


Once your working capital 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, the reality is that you establish your preferred risk per trade, position size, risk/reward ratio, and maximum drawdown. To do this, in each trade, always define your risk/reward (better >1.5 for stock trading and debit spreads), with an OCO order ("One Cancels Other", submit a simultaneous buy and sell order with a profit-taking target and a stop-loss risk level), and never trail it.






4. Operating style


Experience will tell us under which operating style we 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 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 following timeframes:
- Day trade: 5min - 15min - 1hour 
- Swing trade: 15min - 1hour - 4hour (or 1 day)
- Position trade: 4hour - 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 Market


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. In my case, trading indexes, industries, and sectors through ETFs has been a very interesting niche for the volatile market that we have living in since 2020: with symbols as SPY, QQQ, IWM, GLD, JETS, MJ,  DBC, TLT, EEM, ARKK, NOBL, TAN, VNQ, XBI, XLF, etc. operating some of them cautiously in day/swing trades. And repositioning and hedging others in my long-term portfolio every month finishes, protecting it when the next (and inevitable) big market correction comes. 

Then establish the market conditions you are more comfortable with: rangingtrending, or both. And according to this, set the rules for your strategyAs always, experience is the best advisor in all the cases mentioned above.

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


Personally, I work with the following entry/exit strategies, 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, on trend or reversal conditions, with Price Action and volume confirmation.
 
- For exits: by 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 a stop-market order slightly below/above a support/resistance level, always! Define the level price according to a predetermined percentage loss or by levels/trendlines generated by market structure.

- Target: align a fixed level according to your default risk-reward number (usually 1 for a conservative trade, greater than 2 for an aggressive position). You decide if maintain the level or move it, always trailing the stop on gains, a good decision.

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 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 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, my favorite) for your daily 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 is my best advice.