The most common rules and strategies for trading plans that the survey respondents recommended are: Common sense should tell that you must have a written trading plan. Why? Two common denominators of successful traders, brokers, and CTAs are written trading plans and the disciplie to follow them. A written plan keeps you from many trading pitfalls, such as: greed, fear, boredom, a need to be right, a need to be a victim, and masochism.

A written plan should not be for just one or two trades. Your plan should include your time frame for trading. You must approach the markets with an idea of how long you are going to trade (weeks, months, years) and how much money you are going to commit to trading. If your answer to this question is: ‘Well, the only plan I have is to put on a few trades and trade until I hit it big or my money runs out,’ I suggest you not trade at all. I have seen this approach 100s of times in the last 30 years, and I can’t remember even one successful trader over the long run. Sure, there were some ’short-term winners’, but they didn’t last.

You must have a plan before you put on any trade. You must know your risk/reward ratio. You must know where you are going to get in and out. You must know ahead of  time how much money you are going to risk. You must know where you are going to place your stops. You must know when or if you are going to add to a winning position or liquidate all or part of a losing position or a winning position for that matter. You must have a profit objective for each trade and for your entire account for the week, for the month, for the year. You must analyze the impact that commissions and fees have on your trading. (Are you overtrading?) You must know when and how much time you are going to spend: studying the markets, evaluating your open positions, examining your statements, analyzing your winning and losing trades, reading the research, charting and trading. If your answer to these questions is ‘when I get around to it,’ you’re probably better off not trading. You must make time if you’re trading on your own. There are no shortcuts. Consider a managed account if you don’t have the time or temperament to trade your own account.

If you’re willing to develop your trading plan based on your needs and available time, you will dramatically improve you chances for success. Now trading does not necessarily have to take a lot of time. Conservative trading where you only use 10% of your stake for margin and where you enter your profit limit orders and stop loss orders the minute your order is filled doesn’t have to take much time.

Part of any good trading plan is a diary of your trading successes and your mistakes. Actually, what you learn from your mistakes is more important, because if you can keep your losses to a minimum, you will endure and most likely make a great deal of profit on a few trades and lose a little bit of money on several trades. But you must write down everything, the good and the bad. You paid for your mistakes; you may as well learn from them. If you don’t remember them, you’re bound to repeat them.

Follow your plan once you put on the trade. Anyone can write a plan. It often takes courage and cold, hard, unemotional judgment to stick to your plan. The biggest mistake I see traders make is to abandon their plan when the market moves against them. They simply won’t take their losses when they said they would. They want to give it ‘a few more ticks.’ They want to give it just one more day. Losing money scrambles most traders’ thinking, particularly new traders. The final most serious error made by traders and brokers alike, when they are in a losing position they should have exited, is, ‘Well, let’s watch it.’ This is an example of two people reinforcing each other’s faulty reasoning. Following a written plan solves this ‘Let’s watch it’ problem and usually saves the trader a substantial amount of money. I admit, trading a plan isn’t as exciting as trading without one, but it’s a lot more profitable, at least for me and my clients.

If you have a trading plan, don’t let your client or your broker talk you out if it unless it’s proven to be a disaster. I recommend that you first test your plan with regression analysis and paper trading. I have known 100s of traders over the years. Almost all the ones who have traded for at least a year have had at least one train wreck. I define a train wreck as ‘hanging on to a losing position until at least half the equity in the account is lost.’

A trading plan with strict money management rules with an emphasis on loss control would have prevented every one of these wrecks!

A trading plan must be able to be measured. For example, your plan can’t say, ‘I’ll trade conservatively.’ It must say, ‘I’ll risk no more than 2% of my equity (capital) on any given trade.’ It can’t say, ‘I won’t use too much of my equity for margin.’ It must say, ‘I won’t use more than 20% of my equity for margin.’ It can’t say, ‘I’ll enter my stop after my order is filled.’ It must say, ‘I’ll enter my stop within one minute of my order being filled. It can’t say, ‘I’ll stop trading if I lose a lot of my equity.’ It must say, ‘If my equity falls below 50% of my original deposit, I’ll liquidate all open positions as soon as possible and stop trading.’ It can’t say, ‘I want to make as much money as possible.’ It must say, ‘If I make 100% on my original investment, I’ll withdraw 50% from my account and not use it to trade.’

Your trading plan must fit your style and your comfort level. For example, if you know you have emotional ups and downs, you must be sure you write your plan when you are on an even keel. Some traders are most vulnerable and optimistic when they have just gotten a raise, liquidated a Certificate of Deposit or come into an inheritance. A financial windfall should not affect your trading plan. However, if the risk capital you are trading suddenly becomes necessary capital, stop trading, and get out of all positions as fast as practical.

Make sure your trading plan fits the amount of capital in your account. You should not have a trading plan that calls for putting on multiple contracts if that means you have to use most of your money for margin. Be sure also that your account is adequately funded. Deposit sufficient capital and trade conservatively enough to avoid margin calls. In my experience of 20-some years in the business, margin calls are the number one thing that promotes faulty judgment. Do whatever you can to avoid margin calls. If you want to trade a market that requires $5,000 in margin, start the account with $25,000. That means you are only using 20% for margin, which is a good goal for new and experienced traders alike. This does not mean you want to risk the entire $25,000. It simply means you will make a better decision if your position loses a $1,000 of a $25,000 account instead of losing $1,000 of a $5,000 account.

A trading plan forces you to think about each possible trade beforehand. I think the most important part of a trading plan is examining your exit strategy. Most traders have an entry strategy but fail to think through their exit scenarios. This leads to irrational, emotional exits from a trade.

When you enter a market, develop two exit strategies: one if the trade goes bad; and one if the trade goes good. By planning every trade from the beginning to end, you are forced to think about how far the market might move against you or with you. This approach is intended to eliminate the high-risk/low reward trades. This helps avoid the anxiety and resulting bad decisions that can come from poorly planned trades.

You can’t control the markets, weather, prices, the Fed, the news, the funds, disasters. Worse yet, as an observer of thousands of traders over the years, I’ve learned that most traders don’t do a very good job of controlling themselves when the markets are roaring with them or against them. To solve this ever-present danger of loss of self-control, a written trading plan is the only answer. It doesn’t even have to be a perfect plan. But in the heat of battle, you must stick to your plan. It is critical that you create your plan when you are thinking clearly. The best time to formulate your trading plan is over several days, when you are well rested and emotionally stable. Do not be in the markets when you are writing your plan. Show your plan to someone in the futures business whose opinion you respect. This person should be someone who is experienced in the markets and has made money trading. Then submit your plan to a competent, thorough regression analysis. If you don’t know how to do this, ask someone who does. If your plan stands up to the regression analysis, you are ready to test it in the marketplace. We suggest you start with at least $25,000. At first, don’t risk more than 2% of your capital on any given trade. It’s easier to stick to your trading plan if there isn’t too much money at risk. It’s the big dollars that cause traders, especially novice traders, to deviate from their plan and second-guess it. We’ve all done it. The purpose of this advice is to help you avoid sabotaging your plan as thousands of traders have done before. You’ll probably have to learn this lesson the hard way with your bankroll. Hopefully, it won’t cost you too much.

This brings us to the end of this lesson on the importance of a trading plan. Remember that successful CTAs use written trading plans. To prove this to yourself, all you have to do is read their disclosure documents.

• Keep you from making emotional decisions.
• Help you exit a losing position early.
• Help you manage your money and conserve your capital.
• Keep you from losing most of your equity in one or two bad trades.
• All of above

Question 2 : Most successful CTAs we’ve surveyed have written trading plans.

• True
• False

Question 3 : What percentage of the losing ex-traders we have surveyed did not have a written trading plan?

• Over 95%
• About 50%
• About 25%

Question 4 : You must have a miniplan for each trade as well as an overall long-term plan.

• True
• False

Question 5 : Your trading plan should take into consideration the following:

• The length of time (weeks, months, etc.) you plan to trade.
• Your appetite for risk.
• The financial goals for your account.
• Your temperament.
• The amount of time you can devote to trading.
• The amount of capital you have committed to trading.
• All of above

Question 6 : Part of any good trading plan includes keeping a written record of your winning and losing trades and your thinking behind them.

• True
• False

Question 7 : The biggest mistake made by traders who have a plan is:

• They abandon their plan when the market moves against them.
• They place their stops too far away from the market.
• They risk too much of their capital when they are extremely optimistic about a trading opportunity.

Question 8 : The majority of ex-traders stopped trading because they lost their money:

• In several small losses in several different trades.
• In one or two big losses in one or two trades.
• Both of the above.

Question 9 : Your trading plan should have specific money goals.

• True
• False

Question 10 : You should ask an experienced futures professional to review your plan.

• True
• False

For your answers to above questions send an email to trading-plan (at) makefriendsandmoney.com with Subject: “Trading Startegies”

(an autoresponder will reply correct answers to you.)

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Use stops. But you must be aware of their limitations. You must realize that your order will not necessarily be filled precisely where you have placed your stop. You also must

realize that occasionally mistakes can be made.If you trade stocks, you know that it’s possible for orders to be lost, or taken or placed incorrectly. The point is that just because you place a stop, doesn’t mean you can walk away from a trade and assume everything will be perfect. You must take an active role in your trading and your open positions.

Check your stops, daily if necessary, to make sure they are still in place. Be prepared to move them if you have profits. You must protect those profits as best you can.

Every book you read about trading stresses the importance of using stops-actual stops not just stops ‘in your head.’ I did not use stops for several years as a broker, and now I know why. First, I did not want it to appear that I was just trying to generate more commissions by using stops.Second, early in my career, I was not smart enough to just trade trending markets. I traded choppy, nontrending markets trying to pick tops and bottoms. If I had used stops, I would have been stopped out continually. In retrospect, it would have better for my clients if I had traded only trending markets and used stops.

There would not have been some of those bloody massacres I perpetrated by my lack of respect for leverage and the markets. Third, and the reason I am least proud of, is that I did not use stops because I wanted my clients to need me. I did not want it to appear that a trade was on automatic pilot by entering the stop right after we put on the trade.” All a novice trader should have to know about stops is that the most successful and sophisticated Commodity Trading Advisors (CTAs) have stops as an integral part of their trading programs. They set predetermined risks and stick to them. They do this unemotionally, unlike many novice and even experienced traders.

Successful trading is all about limiting risk and maximizing reward. If you insist on trading without stops, you remove one of the two major elements for success. This sets you up to eventually fail.Not using stops is like walking a high wire without using a net. You might get your adrenaline fix, but one bad slip can kill you.

Over the years, I have received literally thousands of suggestions that anyone trading futures should use stops. The preceding comments are representative of these suggestions. I hope I have made the point. If you insist on not using stops, the vast majority of brokers and traders we interviewed feel you should not be trading.Here are the other rules and trading strategies for beginners that occurred most often in our surveys: Don’t discuss or justify your trading decisions with your family, friends or acquaintances. Doing so ‘marries’ you to the position and it becomes all but impossible to maintain your trading discipline.Only commit 25% of your equity to the markets. Keep 75% in reserve for margin calls and a psychological cushion.

NOTE: The 25% figure in this example ranged from 20% to 40% in the survey responses.

Design your exit strategy upfront, before the trade is even initiated. When you put on a trade, enter both a Good ’til Cancelled Money Management Protective Stop and a Good ’til Cancelled Profit Objective Limit Order for that trade. As soon as one of those two exit orders are filled, cancel the other one.

Incidentally, if you form the habit of consistently entering a ’stop loss’ order but not a ‘profit objective’ limit order, you are forming sloppy habits, which are sure to eventually produce sloppy results. Furthermore, entering these ‘money management’ orders ahead of time lets you make your trading decisions during quiet times of contemplation. This prevents you from becoming victimized by market action and making emotional decisions during the heat of battle.My advice for beginners? The only thing I can tell them is the major mistake I made when I started trading long time years ago. And I still make it, although not as often. When I started, I did not cut my losses short.

I figured I was smart and that most of my trades should be winning trades. And if I waited long enough, my losers would come back and I would have a winner. I would ‘bargain’ with the markets and say to myself, ‘I just want to break even on this loser. I promise I will liquidate when the market comes back to where I bought it.’ The market doesn’t know where you got in or care. And it may never come back during the life of that contract. Often, it doesn’t.

Dear beginning trader, I have a message for you. I have watched 100s of brokers and traders in this office for over 20 years. Most of their trades are losing trades-even the most successful brokers. This is how you must think about losses: Anticipate them. Expect them. Plan for them. Welcome them. Embrace them. Grab them. Your first loss is your least loss. Most important, don’t take losses personally. They are an integral part of successful trading.

Sometimes brokers don’t want to liquidate a losing position because they’re worried their client will think they’re just trying to make a commission. That is a dumb reason. A market going against a trader can cost a lot more than a commission. Beginners must realize that getting out of positions is even more important than getting into positions. I was a trader on the floor of a major commodity exchange for 23 years. Here’s my advice for beginning and experienced traders as well. The most important rules for a speculator to be successful are discipline and trading with the trend. A speculator, no matter how knowledgeable, capitalized, or confident, will never be consistently successful without discipline. There is no question that peculating is a stressful and emotional activity. The equity, futures, and options markets are unpredictable in nature and thus cause a natural amount of inherent anxiety among the participants.

The equalizer to this anxiety is discipline. Speculators cannot control the markets, but they can control themselves. The speculator’s ultimate success or failure depends on his or her ability to: quickly identify a losing trade, admit the mistake, and have the discipline to get out of the trade with a minimal loss rather than being stubborn and compounding a loser into an even bigger loss. The same discipline comes into play for profitable trades. A speculator must never turn a winner into a loser. Although I hate clichés, it is true that you can never go broke by taking a profit, no matter how small. Add to a winning position if the fundamentals and technical information haven’t changed. I think most speculators lose money because they don’t create trading rules for themselves and they lack the courage to accept losses as part of the game. Most speculators lack the discipline to stick with a trading philosophy during the bad times as well as the good. As a result, they become inconsistent in their trading methods and, accordingly, so do their results.

There is strong misconception on the part of the general public that speculating in the financial equities’ and commodities’ markets is akin to gambling. They do share some of the same characteristics, but speculating is a business and should be treated as such. A Fortune 500 company coming off a bad quarter after four good quarters will not suddenly overhaul its business plan, the same business plan that produced those four good quarters. A speculator should be guided by the same philosophy. Find out what works for you and stick with it. Don’t change you trading rules and lose your discipline because of a few bad trading days. Your first trading rules should be to protect and preserve your trading capital. The name of the game is to survive. The opportunities to make a lot of money in the markets do come along. But you must be around to take advantage of them.

NOTE: This “preservation of capital rule” came from literally hundreds of traders and brokers alike. Some additional comments along these lines were: Only risk money if the trend has already started. Don’t try and pick tops and bottoms. Take your bite out of the middle. Standing aside is a position. Don’t let your need for action force you into a trade because you’re bored.

Make sure the risk/reward ratio is at least four to one. If you don’t know how to figure out a risk/reward ratio, stay away from trading until you do. I have been on the sidelines for as long as six months,

and I’ve been trading for over 20 years. I worked too hard to make money in the markets and I’m not going to risk a D-Mark unless I see an outstanding opportunity where the odds are in my favor, not the market’s favor. (From a CTA from Germany, founder of one of the most successful funds in the futures industry.)

I’ve been a broker for almost ten years. The only brokers and traders I’ve seen make money have these three common traits:

1.They seldom trade.

2.When they do trade, they have a predetermined entry level and a conservative predetermined risk. Their upside objective is seldom, if ever, capped.

3.They only risk a very small part of their trading capital on any given trade.

I follow W.D. Gann’s advice and don’t trade very often. Don’t follow anyone else’s advice unless you know that they know more than you. Be aware that you may be particularly vulnerable to someone else’s advice or hot tip if you have not had a good trade in a while. You may be desperate and looking for anything to relieve the pain of losing. It’s easy to talk yourself into or out of something when you’ve lost your confidence. Loss of confidence often comes from losing. Have a game plan for exiting losers. Make this plan beforehand because you almost never are thinking clearly about a position when it’s a losing position.

NOTE: The majority of submissions for the most recent surveys focused on limiting losses and did not talk as much about riding winners.

• (1)  ‘The trend is your friend’ is the most important rule you can follow. Always trade with the trend. Only add to a position if you have profits in that position and if the long-term trend lines confirm the trade.
• (2)  Don’t overtrade. Most beginners trade too much and/or start trading with too little money in the account. I suggest you have enough money to be wrong 15 to 20 times and still have enough money to continue trading.
• (3)  There is never an emergency to get in any specific trade. In futures, if you miss a market, simply wait a little while. Another market will look just as good in a month or two or three. Relax; only trade the very best opportunities. Don’t talk yourself into a trade just because you want to be in the markets. The markets will always be there. They’ll wait for you. Trade them on your time, not theirs.

Most new traders don’t respect the leverage of futures trading. If they open a $10,000 account and initial margin is, say, $1,500, they want to buy six contracts. A small move against them could trigger a margin call and right away emotional decisions come into play. I suggest that a new trader not use more than 20% of his or her equity for margin.

NOTE: as mentioned earlier, many experienced brokers made this suggestion. The range was 20% to 40%. The average was about 25%.

Patience is a common attribute of many experienced, successful traders. Beginners are almost never patient. They want to ‘do something.’ Often they are proactive in their business and personal lives and want to trade the same way. In futures, riches often come to those who have the discipline to wait. I don’t mean wait and watch a losing position cost you half your trading capital. No, when it comes to cutting losses short, you must be proactive. However, you must be patient when standing on the sidelines waiting for a solid trading opportunity. You must be patient when you have a winner, patient enough to let your profits run if market conditions warrant.You must be patient and not add to a winning position prematurely. You must be patient with your broker, the floor, the trading conditions, the economy, the weather, the technical indicators, the fundamentals, yourself. Trading futures is not for control junkies. You can’t control the markets. Many otherwise successful usiness people have lost a lot of money trying. Ride the train (the markets) in the direction it is going. If you can keep from attempting to impose your will and maintain a cool head right from the start, you’ll be way ahead of most novice traders.Be careful not to let a news item disrupt a sound trading plan. For example, I have seen many a new trader initiate a position that shows a profit almost right from the beginning. The trading plan called for certain profit objectives based on reasonable planning before the trade was made. Then some news that was bearish for the position made the new trader nervous. The trade was exited prematurely, counter to the trading plan. The most substantial part of the move was missed. You must have the discipline to not let your emotions affect your trading decisions. Remember, don’t overreact to a news item or a market ‘hiccup.’

The closing comments in this chapter come from several books on this subject. The rules quoted here from these authors reiterate and add to the comments I’ve received from brokers and traders.

1.  Be mentally and physically ready to trade. Every trading decision must come from an untroubled mind, free of pressure. If you’re concerned about your health, your family, your job, your finances, or any other major distraction, you’re not prepared to take advantage of the markets. Wait until these problems are less significant so you can give your full attention and concentration to the task of trading.
2. Know your stress limit. Stress can be caused by having to make trading decisions. Stress can be caused by unexpected margin calls. Never risk so much on a trade that it causes you to lose sleep. If your trading is causing you to lose sleep, as Jessie Livermore said in his famous book, Reminiscences of a Stock Operator, ‘liquidate down to your sleeping level.’
3. Don’t blame others for your mistakes. On the surface, it’s always easier to blame your broker, the floor, bad information, poor communications, and any number of scapegoats. You are responsible for your actions. Blaming someone or something else for your mistakes keeps you from discovering the real reasons why your trading is going badly.
4. Don’t trade on hot tips. They are as common as dirt and worth about as much. Experienced brokers and traders will tell you they hear them almost daily. It’s good to seek information from market professionals and sources you believe to be reliable. But don’t let those with so-called inside information persuade you to deviate from your trading plan.
5. Don’t talk about your trading. If you do, you are simply giving yourself additional reasons to stay with, avoid, or get back into a trade. When you talk about a trade, you are ‘investing’ yourself in that trade. By repeating your reasons for your position, you are continuing to sell yourself on that trade. It then becomes more difficult for you to be objective about that trade.
6. Most traders, not just new traders, make decisions based on hunches, emotions, and feelings. Thinkers avoid this kind of trading. How do you avoid ‘just reacting to things’? You need a method or trading plan that can be measured. You must be willing to work and develop that kind of a trading plan. You then must commit your plan to writing. This requirement will eliminate most traders… and, I believe, is a major reason why most futures traders lose money.
7. “To be a good trader, you must be intellectually honest, in fact brutally honest with yourself. If you truly understand why you lose and why you win, you will be well on your way to trading successfully.
8. Examine your positions frequently. Keep asking yourself, ‘Is this trade still okay?’ Make sure all your trading decisions are informed decisions, not emotional decisions or uneducated guesses.
9. Good trading means good money management. You must always know how much you are willing to risk on an adverse price movement. Many traders limit this amount to no more than three percent of their capital. NOTE: Throughout this material you will see that different brokers and traders have different percentages of their capital they are willing to risk on any given trade. The range is from one percent to five percent.
10. Never think you are smarter than the market. Not placing stops will come back and take a big bite out of you. And if you don’t use stops, you deserve to have a big bite taken out of you. Hopefully, it will hurt enough to keep you from doing it again. This is experience speaking. I can show you my scars