After some extensive research on creating a “trading plan”, which for me will have the purpose of a business plan especially since I want to make a living at this. I saw a lot of different ideas of what should constitute a trading plan. The varying degrees of what is important along with the loose terminology usage guided me into what I refer to as a “trading model”. My trading model consists of 4 parts.
1. Trading Vision&Goals – this needs to be a sane reason for entering this “business” which has less than a 10% success rate. The financial objectives defined for weekly, monthly, quarterly and yearly targets within a conservative risk management plan. Defining my ideal trader and how I will objectively evaluate my trading skills irregardless of whether a trade was successful or not.
2. Trading Mindset – Define how will I on a daily basis stay alert for the best setups, remain impartial to what the last few trade results were, and remain non-biased in my “always on” market analysis. Identifying the cause for lapses in trade judgement. When scalping how to stay sharp and focused for 6.5 hours.
3. Trading Plan – this is the default term used in the industry which encompasses a very nebulous concept. My use of the term trading plan includes
a) a strategy which identifies the timeframe to trade in, all the chart layouts with indicators (workspace names in Tradestation), the strategy setup and signal bar, entry criteria(s), exit criteria(s). There should be a written description along with screen shots of what I am looking for.
b) risk & money management – Which explains the different way to control not only the risk of a single trade but also the overall portfolio risk when they are multiple swing positions open. Criteria identified for scaling in or out of positions.
c) daily routine – The what&when for my toDo lists. During pre-market, in-market, post-market, and weekend. Prioritizing the lists, being aware of the lure for the Holy Grail.
e) prerequisites to “Live” trading – This objective includes backtesting chosen strategies for risk and p&l. Repetitive exposure or practice at identifying trade setups (i.e. 10,000 hours or 10,000 setups). Incorporating ToS’s OnDemand market playback, analysis of 2-4 weeks of paper trading, replay of video during trading simulation. Defining the exit criteria from this stage.
4. Analysis of Trading Performance
a) collection of the trade data – journaled in Excel, chart images of each trade to include the chart setups + entries + exits, video of daily trading activity w/audio of what I was thinking or seeing at the time, charting of portfolio performance vs. SPY
b) Identifying and determining the effect when successful following a strategy vs. my whimsical or cowboy trades on p&l and risk. Grade each trade for setup identification, early/late/ontarget entry, trade management like scaling out, trailing stops targets. Measure stop levels if they are too tight or too loose for the current market volatility and my position size
c) Measure #w/l, p&l, avg. winner, average loser, SortinoRatio, MAE, etc
c) A few sentences for a daily wrap-up of what was done correctly and where improvement is needed.
The resources that helped generate my “Trading Model”
“Master Profit Plan” by Graifer
“Diary of a Professional Commodities Trader” by Brandt
“Trading Plan Template” by Wilcox
“Mike Scott’s Trading Plan” by Scott
Numerous articles written by Dr. Steenbarger posted on his blogs
“Come Into My trading Room” by Elder