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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