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TRADING PLANS

Justine Pollard discusses your roadmap to successful trading.

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our roadmap in the marketTraders, especially successful ones, can’t stress enough that a trading plan is your roadmap in the market. Without a map you can get lost. Nevertheless, some

people think a trading plan is superfluous. Despite the statistics, there are still many traders and investors who venture into the business of trading without getting organized through a trading plan.

That group of traders and investors will belong to the 80 per cent who fail to make money in the markets. An educated guess is that a further 15 per cent will garner mediocre results. The final five per cent, who make the greatest profits from trading, will go on advocating, like prophets in the desert, that traders need to develop a trading plan.

In this article I will show you what traders expose themselves to in the market should they choose to enter the market without a personal trading plan.

To plan or not to planThere are consequences to trading with, or without, each of the following aspects of a trading plan.

• Goals and objectives With: This is where you need to ask

yourself significant questions, such as why you want to trade, what your trading edge is and the returns you would like to

achieve in the market. When things become unclear or you hit that cluster of losses, your goals and objectives keep you afloat and motivated.

Without: Without a trading plan, you can continue to explore the limitless number of goals and objectives you can set for yourself and keep yourself occupied for the next century.

• Trading structure With: Determining your trading structure

is beneficial for tax purposes and asset protection. Your choices range from becoming a sole trader to setting up a company.

Without: Without a trading plan, you can go from one trading structure to the next and see what works for you.

• Trading tools With: There are very many resources

that are easily available to you as a trader: computers, charting software, data providers, sources of information, websites, brokers, and more. If you key the words ‘trading tools’ into an Internet search engine, you will have 87,200,000 accessible and related searches you can click in a second.

Without: Without a trading plan, you can purchase each resource and go through a trial and error process to gauge what works best. These tools are always updated, so be sure to update yours as well.

• Trading style With: There is a timeframe in which

you can trade. Without: Weighing the pros and cons of

each trading style is not part of your trading since you do not have a trading plan. So you may want to try short-term trading, medium-term trading or long-term trading.

• Trading instruments With: Choose the kind of instruments

you want to trade and the markets you want to trade. You can select from shares, CFDs, options, warrants, forex, futures, indices, and so on. Online trading has made it possible for you to trade the global markets as well. You can concentrate on trading within your country or you can trade globally. The choice – even if it is overwhelming – is yours.

Without: Without a trading plan, you do not need to focus on what suits your chosen trading style.

• Trading indicators With: There are a hundred and one

trading indicators you can use to select a good stock. With a plan you can take a simple approach and concentrate on the trading indicators you have decided to use.

Without: Without a trading plan you can endeavor to learn all the available indicators, even though using too many indicators may

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be one of the things that bog you down.

• Money managementWith: Managing risks and money is a

key to trading success. You need to include information in your trading plan on how to determine position size, capital allocation and stop-loss methods. Strict money management rules must be adhered to. Minimizing losses and attempting larger profits must be considered. Stop losses are a capital-preservation tool that traders use to exit trades when trades move against them. It’s very easy to buy a share, but exiting the share is the most challenging part. This is the difference between successful traders and those who fail — successful traders know that the secret to their success is in the exits. Exit strategies should be included in your plan.

You cannot control the markets or determine how far a stock will rise or fall, nor when it will happen. The only thing you can control is how you manage your risk in the market. Just one trade can wipe out the entire profits for the year, or possibly more, if you fail to use a stop loss on a trade.

Without: Without a trading plan, there is no need to have exit management. Without a trading plan, the goal of a stop loss, to protect capital by keeping losses small and protecting profits once a trade moves a trader’s way, is non-existent.

Without Plan A, B or C what is next?These are just some of the common aspects in trading that should be considered in a personal trading plan. Without a plan though, you can experiment and pursue all aspects of trading indefinitely. But will this lead to success?

As a trader, you must be prepared for the unexpected. The worst-case scenarios in trading are inevitable and will occur. Without a Plan A in the first place, how can you have a back-up plan or strategy for difficulties such as poor internet connections, power outages, a market crash or more?

An adventure in the business of tradingThere are traders and investors who have gambled their way through the market without any preparation. At a cursory glance, you may think these traders are in it for the excitement of trading, gambling and wasting resources. You can call it ‘adventurism’ on their part.

Indeed, you can go for adventure in the business of trading without developing a trading plan if you are not sure what you want from trading. If becoming successful and increasing your profitability in the business of trading, or not, does not make any difference to you, there is nothing to equal the exhilarating feeling of not knowing and being surprised when the market plunges or rises. Win or lose...you’ve had your adventure.

However, most traders are in it not just for the adventure of trading but also to increase their wealth. There is a need to recognize the substantial contribution a personal trading plan makes to achieving success.

Why would you enter the world of trading without a plan?Some traders who do not develop a trading plan hold misconceptions that have become widely accepted – to the detriment of these traders’ performance. Some of the misconceptions are:

• A trading plan is a waste of time and money. A trading plan can be misconstrued as just a structured written document with precise specifications and parameters. However, a trading plan is a process of formulating strategies and of decision-making that evolves through the years.

• Trading plans need to be smooth and perfect. Here is another misconception that keeps traders from creating a workable trading plan. Tweaking their plans to reach perfection becomes their primary preoccupation over and above taking the first important steps towards the business of trading. A trading plan is dynamic and evolving, just as you are as a trader.

• Businesses need a plan; trading is not a business. On the contrary, trading is a business. That is why it needs a plan. You put money at risk to make a profit when you trade the markets, just as you would in any small business. You are the biggest investor in your business of trading.

Becoming a SMART traderIf you do not want to become a smart trader, you do not have to develop your SMART trading plan; but I don’t believe that is a smart move if you plan to trade the market. A SMART plan reflects the following key criteria:Simple: keep your plan simple. It is easy to become restricted by too much information in trading and to over-complicate trading by having too many rules. Mindset: is what goes on inside your head. That will make or break you as a trader, because you are the most important part of your trading. Approach: develop an approach that you are comfortable with and that suits your personality and lifestyle. Risk and money management: will be one of the keys to your success in the markets. You need to include information in your plan about how you will determine your position size, your capital allocation and your stop-loss methods. Trading system: includes the signals you will use to enter a trade, such as the set-up and trigger criteria and, most importantly, how you will exit your trades.

Traders can trade without a trading plan, just as travelers can journey around the world without a map or a GPS. Why not?

However, there are many aspects of trading to consider. It will be better for you not to have to experiment with each of them to the extent that you lose sight of your goal. There are challenges along the way that require contingency plans. Such plans are best made in the beginning phases of your trading. While it is true that what matters is the journey and not the destination, it still pays to make the journey as smooth as possible, and to end up triumphant. Having no trading plan poses a huge difficulty in the business of trading and offers zero possibility of success. A trading plan remains your roadmap to successful trading.

Justine Pollard is a share and CFD trader, author of the best-selling book ‘Smart Trading Plans’ and is featured in books including: ‘Ms Millionaire’, ‘Real Lives Real Traders Real Money’,’ 20 Most Common Trading Mistakes’ and ‘The Wiley Trading Guide’. For more on Justine visit her website: www.smarttrading.com.au.

TRADING PLANS

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