Trading: a simple plan

An associate asked me how they might start trading as an honest endeavor. A serious endeavor. I replied with the following.

Well, there are a ton of “how-to” books/sites/teachers out there that might help. But I think a few simple instructions could be useful if followed explicitly. These are tidbits I’ve picked up from reading these last 10 years of learning the process myself.

1) Plan the trade, trade the plan.
2) Set a monetary goal and a monetary loss threshold for a set duration of time.
3) Focus on a very narrow instrument selection.
4) Create a daily routine and trading schedule and stick to it.
5) Trade only one method during the set duration.

Research and pick a trading strategy. It will have well defined entries, risk expectations and profit targets. It will be very specific. Use whatever fundamental, technical, sentiment indicators are appropriate. Write down the entry conditions. The exit conditions are based on reward to risk. Be very strict with yourself on trading this strategy. Do not be tempted with altering your strategy as conditions change with the instruments you follow. If world war breaks out, well, you may want to reevaluate.

Give yourself 4 or 6 or 8 months to trade a single system. Set a profit goal and a loss threshold that overrides this duration. If you make your goal before time is up, pay yourself a bonus. Take a break. If your losses exceed your set level before time is up stop and take a break. Evaluate your plan following performance. Not your trading performance. Your plan following. Did you follow your entry and exit conditions every time. If you did, and still lost money, go back to step 1. Otherwise, rethink this whole trading thing.

Do not trade the SP500. Do not trade 50+ futures. Do not trade 20+ FX pairs. Pick 10 maybe 20 stocks from at most 2 sectors. Learn them. Study them. Follow them everyday. Know when their earnings come out, when their insiders trade, when news is announced about them.

Pick a few hours out of the day, at a set time, and devote that time to research, analysis and trading. At the end of that time, put away the trading. If you have positions on, set broker side stops and leave them be. Do not worry your trades. Either your system works or it doesn’t.

Trade only a single method at a time. (At least to start out). Learn to instantly see your setup in a chart or know that a bit if news will turn a stock into your setup. If you vary methods you’ll never keep track of them and never be able to definitively know whether you’re following your plan or not.

If at the end of your 4 or 6 month trading session you’ve lost money or made very little, research another set of securities, or a different trading strategy. And swap out the old for the new. If at the end you’ve made money add a new strategy to your trading style. Create a plan for that one too and trade it simultaneously. You may want to dedicate another set of instruments to trade that to keep it separate. Over time, if you’re successful, you might have 5 or 8 different strategies that you trade across a couple of hundred instruments.

The key is to make a plan, trade the plan, stick to the plan and finish the plan. This is the only way to know that you weren’t just lucky or unlucky but you were successful. Even losing is a success IF you followed the plan.