Most traders realize the value of having a daily plan, but few seem to have much of one for the bigger picture, unless you call "Make a lot of money, retire to a beach-house in Malibu" a plan. The lack of a road map to Malibu leads most traders astray on there way to the beach.
A business plan should include your primary goals. I took mine straight from Trader Vic- Methods of a Wall Street Master by Victor Sperandeo. That is, my primary goal is the Preservation of Capital. This should be obvious since no one is going to buy their house in Malibu if they lost all their money in the market. The next goal is consistent profitability. Trading represents my primary (though not my only) source of income. Because of this I would like it to be constant. The final goal is "the pursuit of superior returns". This should also be fairly self explanatory. If I could put my money in an Index fund and do better than I can by managing it myself, I would certainly be better off doing that and keeping a job, adding more money to these funds and letting it grow, than I am by managing it myself.
What markets will you trade?
For e, this is primarily US traded equities (though I have recently started trading the Emini Nasdaq and SP500 futures). More specifically, I trade in liquid US traded Equities that have an average daily volume of above 300,000 shares for the purposes of daytrading.
What time frames will you be active in?
Most of my trades will last anywhere from 10 minutes to 3 days. The majority (about 80%) last less than one full trading day. Exits occur when profit or loss signals are hit. (more on this later) As a short term trader the primary time frames I am looking at are Daily, 120minute, hourly, and 15 minute. I will often use the 5 minute and or 2 minute charts to refine an entry.
How will orders be placed?
In most cases I will execute an order using a limit order on an ECN (or via SuperDOT on the NYSE). Generally speaking I will be willing to "chase" a stock by 2-5 levels.
What broker, charting and execution platforms will you use?
I have two brokers (IB and Mavericktrading) that I use. When I execute under 500 shares I use IB. When trading more than 500 shares, or executing an order in which I will need to place a physical stop, I use Maverick.
What kind of risk are you willing to take?
This is different for each person and should seriously be considered before you trade. When I started trading I was 19 years old and had $20,000 to my name (on loan). I committed all of it to trading and was lucky in that it worked out. I could afford to do this because at 19 most of my diet consisted of Pizza and beer at my buddies houses, and twice a month at mine. If I went broke I would be in a similar situation to all of them anyway. It would not end the world as I knew it. Some one who is 45, has a house payment, car payment and a kid who is a senior in High School will obviously have different considerations than I did. Currently I feel that my account should be capitalized at $100,000. This will allow me to make a sufficient return on my capital to support my lifestyle. It also wouldn't kill me to loose it. However, with in the context of my $100,000, if I loose $20,000 of it I need to step back and re evaluate what's going on. This would be an obvious sign of unprofessional activity going on at my end.
How will drawdowns be handled? Every trader has them.
Touched on this a little bit above. In the event that a lack of professionalism on my part results in a 20% or greater drawdown, two things need to occur. First is that I will take a vacation. This does a few things. It first reminds me that Im not impoverished and can still afford nice things. Secondly, it just gets me away from the situation. I used to be pretty mouthy when I was young, and then try to talk my way out of it. I knew I was about to get my @$$ kicked but sometimes I couldn't help myself. It usually made things worse. My grandfather would often say, "Boy, you better throw that shovel down because you just keep digging yourself deeper and deeper". When things are not going according to plan, STOP DIGGING! Additionally, there may be periods where I have a three month time frame where I have not been making money but Im not down 20% either. Should this occur, the same plan shall apply as it is obvious I need some time off, and may need to reassess what I have been doing.
What kinds of markets will you trade. What kinds will you avoid?
There are about 250 trading days in each year. There are a few of them that no matter what I do, I can not turn a profit. The last day of the quarter, Fed Days and Options expirations. I have a simple solution to those. I don't trade. If I have an open position I will manage it, but I will not place a new position or add to an existing one on these days. Its resulted in too much loss in the past. I have also found that I do not do too well on Fridays in general. My approach to this is that on Fridays I will risk only 1/3 of what I do on a "normal" trading day. Additionally, if after two trades I am negative on for the day (on Fridays only) I will take the rest of the day off. This is all in the spirit of thowing the shovel down. <Grandpa would be proud>. I will be most aggressive in trending markets (either broad market or sectors) that are showing strong trends. These are were I am able to be most profitable. I have three setups that I use primarily in my daytrading. When these are "out of synch" then I also tend to stay out of the market until I see them start to act better. <This has happened twice since 1996 and has resulted in a total of 54 days out of the market>
What is your methology. When will you enter a trade? How will you exit?
This is going to be different for every person. Some people will use a purely discretionary system, while others rely on systems. Either approach works fine as long as it suites you. I have three primary trade types.
1) An Oops buy. This is a Wide Range Reversal. Most of the time it is a daytrade, but on occasion (14% of entries) turns into a swing. Over the course of my career this has been my most profitable setup and also has the best hit rate. Over time I have been profitable on close to 75% of my entries on this trade. I use a variable risk control method for this setup. When the market is running my way I will risk $1000 on this setup (1%). When the market is not going my way, but I still for whatever reason want to enter the trade, I will risk $500. If the spread is fairly jumpy and there is a lot of execution risk in the trade, the regardless of what the market is doing I will only risk $300 on this setup . I want to have a 1 to 1 risk to reward expectation on this setup, meaning that for every $1 I could loose if the trade does not go my way, I want to be able to profit $1 if it does go my way. As soon as the amount of my stop has been covered I will at the very least move my stops to breakeven. This is a key to making this setup work over the long haul.
Triples. Basically this occurs when (on a long) a stock hits a peak pulls back, hits a peak, pulls back, hits a peak and then pulls back to a higher low. This is another setup that has a very high hit rate. When I get an entry signal I take a risk of $500. I look for a quick trade here (usually lasts 10/15 minutes). In most cases within forty minutes of the entry the stock is below its entry price. Once the stock has covered its stop I will cover at least 3/4 of the position having covered the stop. Its best to cover it all.
Bullflags and Bearflags. I look for at least two of them, one in a bigger time frame then another in the smaller time frame. For example, when the hourly chart is forming a bear flag, I will start watching the 5 minute chart for smaller ones to provide me with an entry. When the 5 period %D Stochastic reaches an overbought point (in the case of a short) I will start to take entries in the position with a stop above the upper trendline of the flag. These tend to run 1/3, 1/3, 1/3 for me, that is, I will be profitable on 1/3, take a loss on 1/3 and be profitable on 1/3 of the trades. I will only enter these if my potential profit is at least $2 for every $1 in potential loss on a stop, however, as in all of my trades once my original stop amount has been covered I will move the stop to a breakeven point.
At anyrate, hopefully this will get the discussions rolling and provide some ideas for people.
Brandon |
