28 Sep Writing a trading plan — part 1

Writing a trading plan

Part 1

One of the best sources out there for learn­ing any­thing about trad­ing is def­i­nite­ly with­out a doubt; Investo­pe­dia. So many high­ly pro­fes­sion­al con­trib­u­tors and knowl­edge to be found there. That is also where I found this arti­cle on ‘Build­ing the Per­fect Mas­ter Plan’ by Matt Black­man.

So thanks to Matt and thanks Investopedia. 

Part of a series

This is only the first part of prob­a­bly two posts about ‘writ­ing a trad­ing plan’. Not sure how many parts it will have because that all depends on how much work each part will take to write. 

First get this through your thick skull

But before we start I’d like to say the fol­low­ing. Yes, I am trad­ing a very small account and some may laugh. That’s OK. This is my jour­ney and I believe that I need to fol­low my own path and aim for con­sis­ten­cy before I risk too much. It’s not that I can’t lose thou­sands of dol­lars, but why would I risk it? At this point I am get­ting more lucky than actu­al­ly being good. I under­stand this and I accept this. We have to be hon­est with our­selves and acknowl­edge when it’s an abil­i­ty or just sheer luck. So many brag about their gains, but you nev­er hear them on their loss­es. Not me. I strive to be good at this. I don’t gam­ble. I don’t believe in luck. I believe in my plan. And the only way to do this is to be hon­est. I have no ben­e­fit in lying to you because that means I’d be lying to myself. And that is what you will read here. So go on. Mock me. Or… read on and hope­ful­ly I con­tribute some­thing to your jour­ney in becom­ing a trader.

DISCLAIMER

Click here for my dis­claimer. It basi­cal­ly says that I am on my path to becom­ing a trad­er and these are just my opin­ions on how to approach learn­ing to trade. Feel free to check it out and com­ment on it. 

Here it goes…

Writ­ing a trad­ing plan is like writ­ing a busi­ness plan. After all, don’t you think that trad­ing is a busi­ness? I hope you don’t think it’s gam­bling. Even though there is some­thing to be said about gam­bling being a busi­ness as well. Of course I got to see the casi­no busi­ness from up close in Macau and pon­dered their strate­gies and how they play with our emo­tions. Read that arti­cle here. There is also some­thing to be said about an indi­vid­ual treat­ing gam­bling as a busi­ness. Look at all the pro­fes­sion­al pok­er play­ers. Do you actu­al­ly think that play­ing pok­er is con­sid­ered gam­bling to them? If you take the time to mas­ter any­thing it is not just about gam­bling any­more. It is about beat­ing the odds. Increas­ing the prob­a­bil­i­ty of win­ning and keep­ing your loss­es short. This all, my friend, starts with a busi­ness plan. 

Skill assessment

Tech­ni­cal Analysis

I have filled my brain with knowl­edge on tech­ni­cal indi­ca­tors like: 

• Bollinger bands
• Mov­ing averages
• Chart pat­terns
• Japan­ese candlesticks
• Vol­ume indicators

Don’t know what these are? Google them!

Fun­da­men­tal Analysis

I’ve learned about the mar­ket I want to trade which is the WTI crude oil mar­ket. I dove into the fun­da­men­tals of it to under­stand which play­ers there are. What fun­da­men­tals influ­ence this mar­ket and you can read it all here:

• What dri­ves oil prices? The bal­ance of oil inventories.
• What dri­ves oil prices? The demand side. OECD vs Non-OECD.
• What dri­ves oil prices? OPEC vs Non-OPEC.
• What dri­ves oil prices? Spot prices.
• What dri­ves oil? Finan­cial markets.
• Also the IMF work­ing paper: oil prices and the world economy.

Real-life expe­ri­ence

I start­ed off with trad­ing a demo account for a while before mov­ing on to a live account. Read all about it here. What I gath­ered from that is that you have to be active in ana­lyz­ing your trades. Real­ly under­stand them to find out what you are doing right and what not. All these things have helped me to get a bet­ter under­stand­ing of how my trad­ing plan should be. My orig­i­nal trad­ing plan was. ‘You got this, just trade’. Need­less to say my arro­gance was slammed down hard. Hav­ing said that I do think it’s cru­cial to dab­ble your feet a bit first and see if you like the tem­per­a­ture. Then dive in and see if you drown. I ain’t drown­ing yet, my broth­er. If I do, I’ll drown with pride. Hav­ing known I’ve giv­en it my all, my body will drift away in the cur­rent with tiny air bub­bles still com­ing from my nose. And I’ll dis­ap­pear into the green dark­ness of the water. Nev­er to be seen again. Well, until I get stuck in some dam or wash up on some shore. Too much?!

Mental Preparation

In this part Matt sug­gest to gauge your men­tal state for the day. ‘Did you sleep well?’, Do you feel up to the chal­lenge?’, and it goes on to say that ‘if you are not emo­tion­al­ly and psy­cho­log­i­cal­ly ready to do bat­tle in the mar­kets, it is bet­ter to take the day off.’ It also goes on to sug­gest that it is best to have a ‘mar­ket mantra’. This is some­thing that I per­son­al­ly real­ly believe in. Neu­rolin­guis­tic pro­gram­ming, or NLP. Hen­ry Ford’s famous quote ‘Whether you think you can or you can’t, you’re right’ applies here. The thing, though, is that you can direct your thoughts with such a mantra. So here’s mine for when I start my trad­ing day:

“I will focus on man­ag­ing my risk and thus loss­es more than tak­ing prof­its. I am not the mas­ter of the mar­ket, but I am the mas­ter of myself. I will trade my plan and my plan only. Regard­less of the out­come, prof­it or loss, a per­fect­ly exe­cut­ed trade is the ulti­mate goal here. Profit/Loss is mere­ly a score­card at the end of the day to gauge if you are on the right track.”

Now, I’m sure that this mar­ket mantra will evolve as I evolve as a trad­er. I might add things or short­en it. We’ll see, won’t we? There is anoth­er thing I do for men­tal prepa­ra­tion though and that is MUSIC. Ooohh me love me some music! The genre of music that I like to lis­ten to is prob­a­bly not some­thing that every­one will like I think, but it’s called Min­i­mal Tech­no. There’s some­thing about the repet­i­tive­ness of the beats that is so allur­ing. It kind of puts me in a trance and I can focus on trad­ing more. I have a stand­ing desk to com­bine with this and often times I find myself danc­ing in front of my desk look­ing at charts. Kin­da the way a DJ stands in front of his equip­ment and then let’s go of the switch­es and but­tons dur­ing a cli­max (of the song) to do a lit­tle twirl of joy on the melo­di­ous beats. Do what­ev­er works for you. This is my weird way. You find your own and don’t you dare steal mine!

Set Risk Level

In this part we will have to think about what lev­el of risk I am will­ing to take. How many per­cent of my account am I to risk on one day. Mean­ing after los­ing how much mon­ey will I call it quits for the day. Your trad­ing style and and risk tol­er­ance is what will define the lev­el of risk for you. I base mine on the results of my trad­ing his­to­ry pro­vid­ed by my bro­ker in the form of an account statement. 

Bal­ance chart

This is how my bal­ance chart looks like for the last month. From it we can see the fol­low­ing statistics:

• 109 trades taken
  • 88 were win­ners (about 80%)
  • 21 were losers (about 20%)
• the win­ners made an aver­age prof­it of EUR 1.34 and the losers made an aver­age loss of EUR 4.22
• Gross prof­it EUR 118, gross loss EUR 88.69
• Total net prof­it EUR 29.31
• My aver­age con­sec­u­tive wins are 6.36 and loss­es 1.62

No risk, no glory.

So for every 10 trades I make I lose on 2 trades. If my Take Prof­it is 2 Euros and my Stop Loss is at 2 Euros as well that would mean I make 8 x 2 = 16, 2 x 2 is 4, 16 — 4 = 12 Euros. I’d say those are good odds. How­ev­er, to be fair… some of these trades I leave open till they turn a prof­it. If I take that into con­sid­er­a­tion the bal­ance might be 60% win­ning and 40% los­ing. Just to play it safe. That would mean 6 x 2 = 12 Euros,  4 x 2 is 8 Euros, leav­ing 4 Euros prof­it. Which doesn’t sound as great as before but hey… still a prof­it. I do seem to be get­ting the direc­tion right most of the time, but my account gets wiped out because I don’t cut my loss­es short think­ing price action will turn around and go in my favor. Apply­ing such a tac­tic on a nor­mal account is very risky, doing it on a lever­aged account is even more risky. Read here more on how lever­ag­ing works on my account. 

No risk, no glory.

Now that I have a bet­ter under­stand­ing of my trades it’s time to set dai­ly, week­ly, and month­ly lim­i­ta­tions. So how much am I allowed to lose on a day, in a week, or in a month? The arti­cle sug­gest using 1% to 5% of your account size as risk. To answer this I would first have to deter­mine how much I will put into my trad­ing account to start my sec­ond run at trad­ing live. At first I did EUR500,- but in incre­ments of EUR100,- each time. This didn’t work before because of the huge draw­down of trades los­ing in com­bi­na­tion with the lever­age, I would get stopped out by a mar­gin call (not hav­ing suf­fi­cient funds left in my account to keep my posi­tions open) and lose most of my account size. This time around I am think­ing of doing 200 Euros at once, but let’s look at the math first.

Doing the math (BORINGGG!)

If I only put 100 Euros in my account, I cal­cu­lat­ed how many trades I can have go against me (I know the posi­tions open might not make much sense but this is just an exam­ple). Wan­na know more about lever­age? Read this article.

• Cur­rent price is at 50
• 10 bar­rels long at 51 is 1 Euros loss per bar­rel = 10 Euros loss
• 10 bar­rels long at 52 is 2 Euros loss per bar­rel = 20 Euros loss
• 10 bar­rels short at 49 is 1 Euros loss per bar­rel = 10 Euros loss
• 10 bar­rels at 2 Euros loss = 20 Euros loss
• Total of 60 Euros in losses. 

The ini­tial mar­gin of these will be around 40 mean­ing that I used 40 Euros out of my account which had 100 Euros in it to start with, Then if I divide the intial mar­gin with the equi­ty which at this point is 40 as well (100 account minus 60 loss) means I have 100% mar­gin lev­el left. Which at this point means I can’t open new posi­tions any­more. As soon as I hit the 100% mar­gin lev­el thresh­old I can’t open posi­tions. Then when I hit the 50% mark my open los­ing posi­tions are closed one by one to keep me over the 50% mark. 

Obvi­ous­ly, I can have more posi­tions open with less loss­es to still keep me afloat. How­ev­er, I will use 2 los­ing trades as the max­i­mum I will have open at any giv­en moment. Until they hit the stop loss of 2 Euros and take me out.

In con­clu­sion

I believe I am being very con­ser­v­a­tive with the exam­ple above. Also, the exam­ple giv­en is that for a 100 Euro account, but I will fund mine with 200 Euros. So if I use the 1% to 5% risk mar­gin of my account that would mean I can lose any­where between 2 to 10 Euros on a day. My dai­ly risk is at the 6 Euro lev­el. My week­ly risk I will put at 12 Euros. Month­ly at 24. 

Set Goals

I have divid­ed my main goal of becom­ing a suc­cess­ful trad­er into sub­di­vi­sions. It all starts with the first step. These are the sub­di­vi­sions of my goal:

1. Turn 200 Euros into 500 Euros using micro lot posi­tions (in my case of WTI crude oil that means 10 bar­rels per posi­tion) with a lever­age of 50:1.
2. After hit­ting the 500 mark I will up my posi­tion size from 10 to 100 bar­rels with the same lever­age size. The goal now is to turn it into 1000 Euros. 
3. Now we can get seri­ous. I believe that at this point I am doing more right than wrong and am will­ing to risk more. Stay tuned to fol­low my progress. 

I will have to adjust my goals peri­od­i­cal­ly as I go along, but I think that this is a good start­ing point. 

Risk/Reward ratio

On any giv­en trade I will have a stop loss of 2 Euros. I don’t set take prof­its because I’d like to see how they do before I close them. Some­times I let them ride. Some­times I close them soon because I get the feel­ing the tide is about to turn. I know that this prob­a­bly doesn’t make much sense to some but if you remem­ber that I am about 80% right I will still make mon­ey. My trad­ing style is con­sid­ered to be that of a scalper, because I take a lot of posi­tions in a day. I just want to pro­tect my small prof­its by keep­ing a stop loss on any trades that go against me. We’ll see if this works and if I’m doing some­thing right. If not, it’s back to the draw­ing board for me. 

Call­ing it quits for the day

When you start mak­ing mon­ey in the mar­kets it is easy to lose your head. You make some mon­ey, start think­ing you’re the man. Get­ting over­con­fi­dent and start mak­ing mis­takes. This is why it is also good to have a prof­it goal for the day besides hav­ing a risk lev­el. At this lev­el I believe that If I make 15 Euros a day I should call it quits. Remem­ber, the name of the game is: ‘pro­tect your mon­ey’. Hav­ing a good day. Quit while you’re ahead.

To be continued…

Thank you

As always, thank you for read­ing. Let me know down below how you go about writ­ing your trad­ing plan. I don’t bite. Well, some­times… but that’s none of your business! 🙂