Trading Plan Help Required

[Trembling Hand]

Aussiest........... don't want to play my game with my charts??

anyone...whats happening in a basic TA sense?

 

[Temjin]

Beside the comments made by TH and T/A which are invaluable, here are some of my.

Point 1 and 2 are fine as they are your personal preference, there is no right or wrong.

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.

There is several problems I see here.

How do you exactly know 2% risk is an acceptable one based on your "trading plan"? Like TH and T/A have been saying, have you backtested the plan? Using a 2% fixed percentage position sizing strategy, what was the maximum drawdown? Are you mentally prepared to wear twice of that amount? Do you think your account balance can recover if that 2 x maximum backtested drawdown might occur?

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.

This is an untested idea. You will need to find out for yourself. However, increasing your risk gradually without a limit after a profitable trade is usually a BIG NO. At least in my opinion because you are violating your initial position sizing rule.

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

Like others have already said, backtest the strategy to see if it has produced a positive expectancy in the past without minimal optimisation.

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%.

You need to separate your trade management away from your position sizing, they are essentially two TOTALLY DIFFERENT THING. You should only set your stop based on your trading strategy, and not based on how much you are willing to lose. That is, you adjust the amount of shares/whatever you buy in a particular trade so that if it hit your stop loss, you would only loss the maximum % you set initially.

If I were to repeat the above, I would go something like this.

My trading plan tell me that I should set a stop loss of 10% from the price of the security. (based on whatever technical or fundamental signals you use) I am willing to risk a maximum of 3% of my account balance, which is $300. Thus, if the share price is $10.00, I should buy [($300 / 0.1) / $10] number of shares, which is really 300 @ $3000 worth.

Hope this is clear.

 

[skyQuake]

Aussiest........... don't want to play my game with my charts??

anyone...whats happening in a basic TA sense?

Haha! I've been looking at that chart every day for god knows how long. Nice reverse and flip there .
Dare I say its in a very nice uptrend, with brief periods of consolidation. High highs and higher lows.

 

[Timmy]

Aussiest........... don't want to play my game with my charts??

anyone...whats happening in a basic TA sense?

Anyone here... & always up for a bit of TA in the most basic sense ... otherwise I just do it wrong.

Top chart, 3 MAs showing uptrend and all pointing up , and price moving to new highs.
Last few bars activity show a bit of toing and froing at new highs, but close on final bar is strong.

Second chart, again 3 MAs showing uptrend and all pointing up, price not into new highs.
Second-last bar a reversal just below the highs, final bar closing very strong but still below highs

Thats it (v. basic)

 

[skyQuake]

ANZ. One way trip, doesnt even bounce properly.

 

[Trembling Hand]

Yes Gold star for everyone. It's up trending. Easy to see. The most basic of TA at work. so you should of bought and held.

Only problem is that its the XAO and ANZ upside down.

 

[kam75]

Trading Plans are like people. Everyone has their own unique personality and beliefs. No one is alike. And no-one is any better than another. The main problem traders face is crafting a plan that fits THEM. Any good plan should follow sound money management rules, cut losses fast, pyramid and ride winners and generally trade with the longer term trend. Plus incorporate the trader's philosophy, beliefs and goals.

Here’s a Trading Plan showing the various components that need to be addressed when planning a trade. It should help you complete any trade with discipline and consistency.

Trade Details
Date
Market
Stock Code
Entry Signal
Confirmation

Risk Analysis
Entry Price
Stop loss Price
Initial trade risk (%)
Profit Target(s)
Reason for Target(s)
Potential gain (%)
Risk/Reward Ratio

Money Management
Total Account Size
Amount for this trade
Position size
Breakeven level

Order for Broker
no. of shares
Buy Stop / Limit
Stop loss
Take Profit Order Y/ N

Trade Management
Trailing Stop Rules
Pyramid Winner
Profit Taking

Exit Strategy for Trade
Time stop
other

Successful trading requires the meticulous planning of every aspect of a trade and the discipline to carry out your decisions based on your Trading Plan, in the market.


Regards
kam75
_____________________________
http://www.sharesmadeeasy.com

 

[johenmo]

Here’s a Trading Plan showing the various components that need to be addressed when planning a trade. It should help you complete any trade with discipline and consistency.

Successful trading requires the meticulous planning of every aspect of a trade and the discipline to carry out your decisions based on your Trading Plan, in the market.

Sydneyboy - I am trying to develop a plan. And the more I work on it the more I realise it's not a 5 minute throw together. What brought htis home to me was using Amibroker (trial) as I try to figure out what to do. When I chose BHP on an overall up trend, and used simple TA for buy and sell and did a back test, I found that with some adjustments I was able to get 80% return in 8 months and 50% loss in two months. Same indicators, just altering the numbers - on an up trend!!. I admit I know little about AB but the backtest report made me realise that you have to get your plan and test it in both directions.

5 or 6 hours on AB cost me nothing except time, but has saved me from throwing good money away. If I had done this a few months ago I wouldn't have purchased any shares at the time.

All I can say is at this stage invest your time, not your money, in the market.. And I am following my own (limited experience) advice.

 

[kosai]

I like the overall idea behind your plan. It's good to include a set of principles that will outline your overall trading as well as include some money management principles. I think you should also include some goals for yourself, some strict rules about what you will do at critical situations and also detail the entry/exit criteria you will apply to the market. How detailed your plan needs to be depends on the individual and how often they stray away from it. If it's too hard to follow your plan then a trading journal is great to log your thoughts as you trade so that you can better identify them later on. I'll include a quick snapshot of my trading plan. I won't expand all the fields since it took me ages to work on mine, but that will give some people out there an idea of one. I also think making a visual plan is a big plus. It makes reviewing and following the plan far easier.

 

[CamKawa]

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.

Don't forget slippage and brokerage.

Say you are with IB paying 0.08% of trade value for ASX stocks. Every time you buy and sell you rack up 0.16% in brokerage taking your 2% down to 1.84% and then there's slippage.

Should slippage and brokerage be included in the 2%? I've read one source that says it should but others, including Nick's book, don't mention it.

 

[nomore4s]

Don't forget slippage and brokerage.

Say you are with IB paying 0.08% of trade value for ASX stocks. Every time you buy and sell you rack up 0.16% in brokerage taking your 2% down to 1.84% and then there's slippage.

Should slippage and brokerage be included in the 2%? I've read one source that says it should but others, including Nick's book, don't mention it.

This is why I use 1% instead of 2%, there will be situations were prices will gap through your stop.

 

[lakemac]

sydneyboi (and others) may I suggest you read, digest, re-read, implement and consider the following book:

Enhancing Trader Performance by Brett Steenbarger.

Brett is a trained psychiatrist. (No you won't loose your mind, well not just yet anyway ). He coaches traders in real time (amazing stories in his book).

He asks you the reader to ask yourselves these questions, even before you place your first trade:

1. what kind of trader are you (referring to tech, fundamental, gut feel, etc etc).
2. are you trading the right market and/or instrument?
3. are you actually the kind of person that should even be a trader (this one can take a lot of soul searching).
4. are you trading in the right time frame?
5. what are the issues that come up when you sit quietly and think about your trading (he gives some exercises which you do to bring this on - I did this two years ago and I am only now clearing up other things in my life such that I am now making big money).

 

[lakemac]

I forgot to say he then goes on to the development of trading plans.

Guys do yourself a favour and sort out the mental first, then the rest will fall into place.

Of course most of you will not heed this advice (as I didn't for 6 years) and then come back to this post and go "why oh why didn't I listen to lakemac's advice..."

 

[lakemac]

kosai - I loved your "mind map" of the issue at hand.

I use Freemind (which funnily enough is free ) to handle my mind mapping.
http://freemind.sourceforge.net/wiki/index.php/Main_Page
(get the 0.9.x version rather than 0.8 version here:
http://downloads.sourceforge.net/fr...ta_20-max.exe?modtime=1220605935&big_mirror=0

Love the technology. I would be lost without it.

A small snippet of my top level Freemind mindmap:

 

[rub92me]

While I acknowledge it is crucial to manage the psychological side of trading, I think that should be a prerequisite to defining what your personal trading objectives are before you start testing entries/exits or formulating a trading plan.
The below is an example of one of my intraday trading plans for one of the contracts I trade. I haven't given away my exact entry criteria, but they're very simple price/volume related triggers. I tested the entries and objectives in Amibroker, using techniques described in Howard Bandy's Quantitative Trading Systems (Thanks Howard!)

Trading Objectives & Risk Management Rules

A: Win / Loss Ratio = 60%
B: Avg Win / Avg Loss = 2
C: Maximum Drawdown = 25%
Risk per trade (R) = 1% of start capital (SC)
Avg trades per month = 10
Contracts Traded = 1

Verification & Adjustment Criteria

Assessment of Objectives
Assess whether objectives A and B are achieved after 20 trades and every 10 trades thereafter. Start continuous monitoring of drawdown after 25 trades.

Stop trading and back to the drawing board if
1) A < 30 % or B < 1
2) A * B < 0.8
Note that if 1) or 2) are met it can still be profitable, but it’s not good enough for me to keep trading.
3) C > 25 %

Increase contracts traded if
Equity > 2*SC: start trading 2 contracts
Equity > 3*SC: start trading 3 contracts
Equity > 4*SC: start trading 4 contracts (maximum)

Entry Criteria

Timeframe 3 minutes = 1 bar
Buy Trigger (B) Trade secret :
Sell Trigger (S) Trade secret :
Enter trade If B or S is met, buy or sell at market in next bar with preset stop attached


Trade Management (Stop and Profit Rules)

Stop Rule 1: Stop can not be widened under any circumstance
Stop Rule 2 (Trailing stop): Move stop to breakeven when open profit reaches 2R, move stop to 1R at open profit 3R, etc.
Exit Rule 1 (Flip): Long: sell at market if S is met (next bar); Short: buy at market if B is met (next bar)
Exit Rule 2 (Greed): Close position when open profit reaches 5 R
Exit Rule 3 (Time): Exit after 50 bars if previous Exit Rules haven’t hit

 

[Bin57again]

Agree with the comments here. Don't listen to anyone who reckons all you need to do is write down your thoughts, find time to trade and be true to yourself...that's all bollocks. You need a system with an edge. Period.
Also, if you're starting out, work on a mid-long term system not a short term system. Often, you will find short term systems are destroyed by small account size and commissions. (I still can't find a system that's profitable on day trading or position trading (less than 3 days) unless my trading account size is $1m) .
Someone also made reference to Nick Radge's comment of ascertaining the max drawdown then halving it. Good advice.

 

[CamKawa]

Trading Objectives & Risk Management Rules

A: Win / Loss Ratio = 60%

Are you saying your system picks 60% of winners? Over what time period did you run the back test to get that figure? How did you system perform compared to buy and holders over the same period?

C: Maximum Drawdown = 25%

Can you live with that?

Would you mind posting your AmiBroker backtesting results? I'd be interested in having a look. Did you use the walk-forward method? I'm having trouble getting my system to pick more than 40% of winners?

 

[rub92me]

Also, if you're starting out, work on a mid-long term system not a short term system. Often, you will find short term systems are destroyed by small account size and commissions. (I still can't find a system that's profitable on day trading or position trading (less than 3 days) unless my trading account size is $1m) .

Keep trying and testing. The above described has an average hold time of about 2 hours, with start capital of USD 50,000. Commission is minor: USD 2.50 for every buy/sell. I've been trading it for about 5 months and it is still within parameters and tested equity curve.

 

[lakemac]

Rub92me - nice one
Well described.

Bin57again, I would only partially agree with you. Yes an "edge" is important but as any trader knows the physcology is what keeps that "edge" sharp so to speak. If you fear/greed override your system/trading plan no amount of edge is going to work for you.

On a longer timeframe you psychology is also what is going to control your profitability (or loss).

The book "Enhancing Trader Performance" is not a warm fuzzy think of your thoughts kind of book (have you every read it? If not then maybe let those that have make comment...). It is a very hard nosed look at trading and how to keep your trading working for you even when you start to have the inevitable psychology get in the way.

Bin57again you may be one of the lucky ones that is able to totally control your psychology - unfortunately for a lot of us we don't have that kind of innate mind control. Most of us have to learn it. Most of us require training to overcome it. How to train your psychology is probably the best part of the book.

 

[rub92me]

Are you saying your system picks 60% of winners? Over what time period did you run the back test to get that figure? How did you system perform compared to buy and holders over the same period?
25% Drawdown:
Can you live with that?

Would you mind posting your AmiBroker backtesting results? I'd be interested in having a look. Did you use the walk-forward method? I'm having trouble getting my system to pick more than 40% of winners?

My intent was to give an example of how I use a trading plan, not so much about the objectives or the results. It is traded on a futures contract, so buy and hold is not an option. I only trade in a specific timeframe, where the volume and volatilty suits my plan. The 25% drawdown is over the capital required to trade this contract, rather than my entire equity. I can live with losing that.