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Trader Savvy Newsletter


November 9, 2006

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Futures Trading Summit: Nov. 15-16, 2006, Las Vegas

Creating a Trading Plan

Name: Jason Alan Jankovsky

Company:Infinity Brokerage Services

Learn More About Today's Author


 


Creating a Trading Plan

Recently, during my regular daily internet FOREX broadcasts, I’ve had a newer group of traders start attending. The questions they ask suggest to me that most traders have a great deal of confusion regarding their initial attempts to find a solid trading approach. I thought it might be a good idea to address what I feel are the basic issues to a well-rounded trading approach from the point of view that the basics will be the same for everybody; regardless of time invested as a trader. A “trading approach” is what you would call your “trading plan”

When I say “trading approach” or “trading plan” I don’t mean “trading system”. A “trading system” is some sort of organized attempt to find potential in the market—creating a better buy or sell opportunity than at some other time. A “trading approach” has more to do with what is more within your control. As all traders know, once you execute for your entry into the market; whatever happens next to prices will be completely out of your control. Should the trade show a profit or a loss; what you do and how you react to that profit or loss falls under the guidelines of your trading plan.

Any trading system will have its share of both winning and losing trades. A trading plan is designed to maximize your winning trades and minimize your losing trades. Remember, the system does not create your results; your behavior creates your results. The more disciplined you are to following your systemized approach the better your account will achieve the probabilities inherent to your system. For example, when you have a system signal tell you it is time to buy—do you hesitate on placing the order? When it says it is time to liquidate—do you hesitate to exit thinking there might be more in the trade? Many fine systematic approaches used to find quality trades have their success thwarted by the traders’ failure to follow the system as intended by the designer. If the system has a 52% win-to-loss ratio but you (the trader) aren’t taking some of the signals; that successful system has little or no chance of working because the probabilities are now skewed due to the untaken trades. You’re not following the system. A trading plan addresses this problem, not where you buy or sell.

If your approach is more intuitive a quality trading plan is even more critical because highly intuitive traders tend to “know” what to do next but often have a highly vested sense of attachment. They believe in their trade so highly that they will often hold a loser for far longer than is healthy for their account and they tend to add to losing trades because they are so certain of a turnaround. In either the case of a highly intuitive trader or one relying on a completely technical system; it is the trader directly who is in control of maximizing the returns possible from any systemized execution plan. Either a trader will follow the rules required to obtain successful results or he won’t. Your trading plan addresses your personal side of the ledger because in the final analysis it is your behavior that determines your results. You can always control your behavior and you can always do the right thing for your account if you will make the commitment to do so. Your trading plan is the critical link between where you are now and where you want to be as your trading skills develop. Your plan helps you remain focused on what is in your control and your plan addresses how to tell if your behavior is not the kind of behavior that will lead to consistent positive results.

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Many people have asked me to help them develop a quality trading plan. Often the difference between poor results and highly positive results to your trading account is something very simple for you personally but you the trader are ignorant of it. It is for this reason that the cornerstone of a quality trading plan is the commitment to sound record keeping of your participation. Record keeping should include not just the executions you have done but also additional critical data that is often overlooked by traders. You should record the date and time you initiated a trade, the data and time you liquidated, the date and time you placed a protective stop-loss order, the date and time you placed a limit order for your profit objective, whether or not you moved those orders and when you did so, how the trade was liquidated and how much total time you were in the trade. In addition to these notes on your behavior you need to record in as much detail as possible the analysis you used to make that trade and you should write down your personal thinking during the trade. In other words, you want to document your analysis, behavior and how your thinking developed while you participated.

Once you compile a database of personal trading information, the information that is unique to you; you can begin the process of analyzing the relationship between your actual behavior and your actual thinking. It is the information about your unique trading style and behavior that will lead you to develop a very sound trading plan. Because in the final analysis, it is the trader’s actual behavior that creates the net account balance. Regardless how you come to the conclusion it is time to initiate a position or time to liquidate—it is YOU who does that. Therefore, the more you know about how your behavior is creating your results; the better equipped you are to modify that behavior. Since your behavior is the only part of trading that is fully 100% within your control, the better your behavior the better your results.

Your trading plan is the rule set you develop to assist your trading strengths & weaknesses as discovered from your record keeping. For example, you might discover that your trading system is great in a trending market but suffers drawdown during sideways action. You might as part of your trading plan make the rule: “I wait to initiate from the buy side until the market is already clearly demonstrating uptrend”. Your trading plan includes waiting for trend confirmation before using a trend-following approach to execute. That one rule alone may save you countless “whipsaw” trades. You may discover from analyzing your records that you have a tendency to suffer losses on a Friday. Maybe by the end of the week you simply are too tired and can’t execute quality trades. Maybe your plan includes changing your time investment in the markets differently to solve the problem or simply trading only four days a week. The point is, if you make a commitment to analyzing yourself and your actual behavior, you will get the clues you need to modify your behavior and improve your market presence.

As I teach in my Psychology of Trading class, trading is not an easy thing to do well consistently not because it is “hard” but because we as traders focus on the wrong things initially. It takes a mature and serious individual to ask the question: “What’s wrong with ME?” Most traders don’t make the connection between results and behavior until after they have suffered their first serious drawdown. Usually, the systemized approach to trade selection was not the defeating factor.  In addition to your developing execution skills, learn to study your own personal behavior and learn to use that data to improve the side of the ledger you have the most control over. Don’t be the trader who suffers a blow-out that was preventable; develop a sound trading plan that addresses your unique needs and highlights your unique strengths. When combined with a sound execution strategy or “trading system”, a trading plan becomes a powerful tool to maintain your focus and maximize your results.

About Today's Author

Jason Alan Jankovsky, experienced derivatives specialist. Trading extensively in leveraged transactions since 1987, he is self-taught and self-educated. He has authored several trading systems, trained other successful traders and his numerous articles on global cash FOREX have appeared in "Financial Services Journal Online". Born and raised in Chicago, he has spent time in Europe prior to the birth of the Unified European Currency and is considered to be an unofficial authority on the EURO; often speaking at round-table discussions within the industry including "The Las Vegas Moneyshow"and "The New Orleans Investment Conference", founded by Jim Blanchard. He is an avid Sailor and Private Pilot.

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