Trading Plan Help Required

[sydneyboy]

I am new to this forum and while have traded, gambled? in the past have done so with no serious plan.


At the moment my plan is as follows.


1. Follow trends- refer to Darryl Guppy on Trend Trading- trends either up or down seem to have about a 70% chance of continuing. While still learning about T/A are prepared to lose small amount rather than paper trade as personally feel no involvement when doing so.


2. Be ruthless on money management. Strict money management seems to be far more important than actual selection, should show a profit on lower % of winning trades with good management over good selections with bad management.


3. While 2% risk seems to be written in stone among the various contributors am I being naive in suggesting that it would be possible to increase the risk exposure to 3% and at the same time reducing the stop loss margin. In this I note the chart that skyquake provided,(I don't know how to attach but it is #51 under heading "I lost $1600 in one day trading OZL" showing in the Beginners Lounge shows the percentage possibility of consecutive losing trades. In my admittedly general reviews of the market it would seem more viable to cut and run very early if a price drops as the chance of reversing after a small drop seems to be less than the likelihood of the trend continuing.


4. While trading profitably to gradually (say 0.5%) increase in risk after each profitable trade and reduce back to 2-3% after first losing trade to minimise capital loss.


5. Where the shares, options, whatever rises either:-

(a) sell a percentage as soon as transaction costs are covered and increase the stop loss to this amount so barring disasters at worst you will break even on that trade, or

(b) continue to hold all until a reversal and sell all at first opportunity (again on the basis that once a trend starts it is more than likely to continue). It means that you will never sell at the top of the market, who does anyway, but you should be reasonably close to it.

I am more inclined to option (b) but keen to hear opposing views


I look forward to comments, suggestions, criticisms.


sydneyboy

 

[Trembling Hand]

Can you clarify your thinking on point 3. Seems to be a bit messed up and possibly completely wrong.

 

[sydneyboy]

Thanks TH I got myself all confused. What i was trying to say is best shown in following example.


Presume trading capital $10k , therefore max exposure on any stock @ 2% is $200. If buy $2k of stock can wear loss up to $200 (10%) before stop loss comes into play.


If max risk is 3% or $300 can buy up to $3k of stock, at $300 (10%) stop loss comes in, or could have tighter stop loss @ $200 or 6.67%.


What I was saying refereeing to sykyquakes spreadsheet is that when one is commencing trading and not relying on trading for their sole income their pain threshhold is probably somewhat greater than a full time trader such as TH and provided the numbers are not too great (less than $10,000) is probably better able to handle the inevitable losing streak. I know I probably couldnt handle it if I was trading $100k+. I believe that every trader should pin the sheet next to his computer simply to remind him/her of the inevitability of a losing run no matter what their success rate.


I know the stop loss limits I have set are fairly arbitary but reading between the lines I get the feeling that you (TH) disagree with the fundamental principal that it is best to bail out if there is a slight loss, is that right?


As a matter of interest TH what is your average stop loss % and do you have a rule for exiting profitable trades, you might have said it before but I cannot recall it.


Thanks for the enjoyment in reading your posts and blogs, as you have said previously any novice will learn far more from this site and Guppys books than an expensive weekend with spivs with capped teeth, Hugo Boss suits and driving black BMW's flogging CFD's.


sydneyboy

 

[Trembling Hand]

provided the numbers are not too great (less than $10,000) is probably better able to handle the inevitable losing streak. I know I probably couldnt handle it if I was trading $100k+.

A funny thing goes on when trading small accounts. People are willing to take bigger loses when it should be the exact opposite as cost and inexperience make it 1000 million times harder to survive.

I know the stop loss limits I have set are fairly arbitary but reading between the lines I get the feeling that you (TH) disagree with the fundamental principal that it is best to bail out if there is a slight loss, is that right?

NO. Stops are the cost of doing biz. In any biz small cost are the diff between wining and blowing up.

As a matter of interest TH what is your average stop loss % and do you have a rule for exiting profitable trades, you might have said it before but I cannot recall it.

My stop is based on Max % loss per day as I'm an intraday trader. and that is at 1% or less a day. Now considering 100 trades is a slow day for me and 10 or even 15 bad trades in a row happen often my stop per trade is tiny as a % of capital.

 

[Trembling Hand]

One thing you seem to have not covered is what kind of results you can expect from this "plan".

Its not a trading plan if you don't know what direction your map is pointing you in. And its certainly useless if you don't know what constitutes a broken plan before you set out on your journey. If your plan is to stop once you walk off the cliff it's not the greatests plan. The best ones concern themselves with doing no damage first.

 

[jersey10]

My stop is based on Max % loss per day as I'm an intraday trader. and that is at 1% or less a day. Now considering 100 trades is a slow day for me and 10 or even 15 bad trades in a row happen often my stop per trade is tiny as a % of capital.

Why is your stop based on the day? Wouldn't it be more appropriate to base it on a specified number of trades as your expectancy opportunity is dependent on number of trades rather than a duration of time?

 

[SGB]

4. While trading profitably to gradually (say 0.5%) increase in risk after each profitable trade and reduce back to 2-3% after first losing trade to minimise capital loss.


sydneyboy

Hi SB,

Just my humble opinion but (4) would be too messy for me. Too many changes to the plan especially if there starts to occur inconsistencies within the price patten.eg, up one day, draw down next day. profit one trade, loss next trade

Build yourself a profit base before bouncing around to and from.

SGB

 

[tech/a]

TH is on the money.

Pretty well everyone has a "Plan"
most of those have no idea wether the plan they are trading day in and day out can be profitable after a few months trading let alone a few years.

Unless you know you could be trading a plan to bankruptcy.

So all your doing is trading a group of ideas---nothing more.

The only way to tell is to test your ideas over 1000s of trades in many timeframes.
Forward and backtested.

When developing a plan you must know what it is your trying to achieve.
That will be either
A high win rate much more winners than losers.ie 75% winners
Or a low win rate with much higher accumulated winners than accumulated losses.ie 30% winners of 50% and 70% losers at 5%
OR
a combination of both.

If you dont have this objective satisfied you WILL NOT profit.

 

[julius]

Thanks TH I got myself all confused. What i was trying to say is best shown in following example.


Presume trading capital $10k , therefore max exposure on any stock @ 2% is $200. If buy $2k of stock can wear loss up to $200 (10%) before stop loss comes into play.


If max risk is 3% or $300 can buy up to $3k of stock, at $300 (10%) stop loss comes in, or could have tighter stop loss @ $200 or 6.67%.


What I was saying refereeing to sykyquakes spreadsheet is that when one is commencing trading and not relying on trading for their sole income their pain threshhold is probably somewhat greater than a full time trader such as TH and provided the numbers are not too great (less than $10,000) is probably better able to handle the inevitable losing streak. I know I probably couldnt handle it if I was trading $100k+. I believe that every trader should pin the sheet next to his computer simply to remind him/her of the inevitability of a losing run no matter what their success rate.


I know the stop loss limits I have set are fairly arbitary but reading between the lines I get the feeling that you (TH) disagree with the fundamental principal that it is best to bail out if there is a slight loss, is that right?

Hi Sydneyboy,

"Think of the largest drawdown you can handle, the halve it..."

That's from Nick Radge at the Power Setups seminars.

It's easy to say you can handle a 50% D.D. until you experience it...

 

[Kauri]

or take a shortcut and ride the coat-tails of a successfull, professional, australian trader...
life is only as hard asyou wan to makit..

cheers
.....kauri

 

[skyQuake]

Look up percentage risk model - thats what the table came from. My 2c is if you have a good enough money management system, you'll survive long enough in the markets to be profitable.

 

[Kauri]

or take a shortcut and ride the coat-tails of a successfull, professional, australian trader...
life is only as hard asyou wan to makit..

cheers
.....kauri

did I forget to atach this???

Cheers
...........Kauri

 

[nomore4s]

Hi SB,

Just my humble opinion but (4) would be too messy for me. Too many changes to the plan especially if there starts to occur inconsistencies within the price patten.eg, up one day, draw down next day. profit one trade, loss next trade

Build yourself a profit base before bouncing around to and from.

SGB

4 is making things difficult imo, too easy to start chopping and changing.

If you are using fixed fractional positioning properly you won't need rule 4 anyway.

EG - If using 2% of capital (I use about 1%) as your max loss, as you become profitable and your capital increases so will your postion sizes.

Capital - $10,000, 2% = $200
Buy XYZ @ $10.00 with stop @ $9.00 - Risk is $1.00
Therefore you can buy 200 shares or $2000.00 worth.

But when your capital has increased to $12,500, 2% = $250.00
Buy XYZ @ $10.00 with stop @ $9.00 - Risk is still $1.00
But you can buy 250 shares or $2500.00 worth.

Obviously if you can get a tighter stop you can lower your risk and buy more shares for the same total dollar risk, but tighter stops generally increase your risk of being stopped out. This is why you will hear traders talking about looking for low risk set ups.
EG - Capital - $10,000, 2% = $200
Buy XYZ @ $10.00 with stop @ $9.50 - Risk is $0.50
Therefore you can buy 400 shares or $4000.00 worth.

 

[peter2]

I agree with TH and tech/a that you have five general concepts with very few detailed processes. You need to define the details so that you can objectively backtest and forward test your plan. This will give you some idea if you have a winning system.

1. "Follow trends".
Good, but which time frame will you use as your main directional indicator?
How are you going to define the trend direction?
Can you tell when a trend changes direction (ends)?

Trading setup? How are going to define a trading opportunity?
Are you going to use a breakout in the direction of the trend?
Are you going to buy a dip in an up trend?
How are you going to define the entry trigger?
How are you going to decide on a stop loss price?

2. Think you are confusing trade mgt with money mgt. Trade mgt tells you when to alter your SL to a TS to minimise risk and then to protect profits. You will need to decide how you do this so that when a trade is open your plan stays in control of the trade, not your brain.

3. 2% is commonly suggested for good reason. Do you have a valid reason to use another amount?

4. If you decide on a fixed fractional position sizing model then use the same risk % all the time.
As your capital grows compounding will take care of itself. (Nomore4s showed you these details)

5. Decide if you are going to take partial profits or not.
Don't have these two options available, as you will always use the wrong one at the time.

A trading plan needs to be detailed enough so that all decisions and actions are straight forward. It should match your expertise and this makes it comfortable to use. As your experience grows the plan evolves as you develop your own trading style. A plan makes your trading consistent and the market rewards consistency.

Business plans: Short term and longer tem goals? Include personal goals with financial goals?
Starting capital, how much are you willing to lose before stopping for a review?
How are you going to locate your opportunities?
What resources do you need? Can you afford them?
How much time are going to set aside?

You have only started on the introduction to your business/trading plan. Good luck with it.

 

[Aussiest]

The only way to tell is to test your ideas over 1000s of trades in many timeframes.

I don't know if TA applies at this stage (except for support and resistance). As somebody else said in another thread, we are in unchartered territory. How can you possibly base your current decisions on past data, seeing as though we're in the middle of a 'credit crisis'? When is it going to end? The psychology of the market would have to be measurably different to what it was, say, 2 years ago.

Having said that tech/a, i think you are a great trader! (vis a vis your shorts on WPL and BHP). Well done

 

[Trembling Hand]

I don't know if TA applies at this stage (except for support and resistance).

Gee I'd like this one teased out a little more!! Are you saying that TA rules for finding good R:R setups and managing trades don't work because we aren't in a ripping bull market

 

[Aussiest]

Yes.

I don't know what an R:R set-up is, but one thing for sure i've noticed is that traditional, basic TA, such as bullish white candles on high volume aren't signalling anything, but a temporary bounce. Certain other candle formations, which according to theory, should signal particular moves, are being crushed by 'bad news'.

Maybe i'm thinking about it from a bull point of view, and therefore nothing is working out. Maybe i should be looking at most stocks on the market like they're in an overall downtrend. Maybe that's why i am constantly disappointed.

Another thing: COH has been gradually climbing, day after day, for no apparent reason that i can see. Sure, they've had some 'good' news, but their dividend isn't that attractive. So, why?

I guess i made my statement because it seems that any form of TA, imo (but i don't use the advanced ones) seems to be knocked out by whatever 'news' comes out of the US. Perhaps 'sentiment' is the thing to trade on, and i don't think TA can predict sentiment at this stage.

Just my ever so humble and uneducated opinion :

Btw, i think the 'trades management' part would work in any market, because you set certain rules for stops and money management. It's the 'buy' signals i am having a problem with (and am therefore not attempting because of). Things just don't make sense. A stock may look good for a buy and suddenly bad news from the US rips it apart...

 

[Trembling Hand]

but one thing for sure i've noticed is that traditional, basic TA, such as bullish white candles on high volume aren't signalling anything, but a temporary bounce. ..............

Maybe i'm thinking about it from a bull point of view, and therefore nothing is working out. Maybe i should be looking at most stocks on the market like they're in an overall downtrend.............

Perhaps 'sentiment' is the thing to trade on, and i don't think TA can predict sentiment at this stage.
...

Boy oh Boy!! These statements with your initial comment are staggering in that you have the answer yet not the ability to put them together.

Have a look at the two charts below and tell me whats going on in the most basic sense.

 

[nomore4s]

lol, no offence Aussiest but your post shows a clear lack of understanding about TA. Good TA traders will be doing well in this market as Tech short trades have shown.

A big reason your candles aren't working out is because your going against the major trends which is why they are only temporary bounces, also imo it is hard to purely trade off candle formations without some other form of analysis (but I'm sure there are traders that do it).

 

[nomore4s]

Another thing: COH has been gradually climbing, day after day, for no apparent reason that i can see. Sure, they've had some 'good' news, but their dividend isn't that attractive. So, why?

Does there need to be a reason?

A stock may look good for a buy and suddenly bad news from the US rips it apart...

That's what happens in a bear market