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Trading Plan - basics and tips

Discussion in 'Trading Strategies/Systems' started by RichKid, Aug 13, 2004.

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  1. RichKid

    RichKid PlanYourTrade > TradeYourPlan

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    Hi folks,

    Someone started a thread on a written trading plan but I can't find it- meant to put this there. This is a link to an article by Louise Bedford, brief but a start nevertheless:

    http://www.asx.com.au/myasx/newsletters/20040810_TradingPlan.shtm

    (Any chance of having a site map/index of topics or a search engine Joe/JetDollars?)

    Thanks,
    RichKid
     
  2. RichKid

    RichKid PlanYourTrade > TradeYourPlan

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    Re: Trading Plan- basics and tips

    Well we've got the search function now so problem solved. Looks like trading plans aren't that common- very worrying.
     
  3. JetDollars

    JetDollars

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    Re: Trading Plan- basics and tips

    RichKid,

    Sorry I missed this post so how.

    Regarding trading plan, I am very keen in writing one and currently do so with 80% completed.

    I alway try to search so sample of trading plan, but never find any useful one. I know that everyone trading plan is different, but still it will be useful if I have some sample.

    Not many people in this forum have a written trading plan as far as I know because I posted this topic before in the forum.

    Do you have a traiding plan? is it written down?

    Do you have a trading system? is it written down?

    Does the trading plan include trading system?
     
  4. RichKid

    RichKid PlanYourTrade > TradeYourPlan

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    Re: Trading Plan- basics and tips

    Hi Jet,

    My turn to apologize! Only just saw the reply, I'm still forming a plan!!

    I've got odds and ends written down but things aren't clear yet. I basically set entry, exists before entering (with support levels and risk to return).
    I'm more or less formulating a George Soros like strategy- a core holding of steady uptrenders with more speculative ones thrown in. Each will have its own rules for entry, exit, management, profit targets etc. I follow Edwards and McGee as my 'master plan' but haven't quite decided how to incorporate fundamental analysis into it (per Ben Graham's Intelligent Investor). My capital is limited so that affects things as well. Patience is the key to my survival- I do overtrade sometimes and get fixated with stocks. My trading system/plan will be linked closely to my overall money management plan (which includes stocks and other matters too).

    Safe to say my losses are diminishing now and my profits are small but more consistent. The key to my mind is to take the emotion and stress out of it. I'm getting there. Protecting my capital is becoming more of priority for me.

    I'll post more once I have real written plan.

    How're you going with it?
     
  5. tech/a

    tech/a No Ordinary Duck

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    Re: Trading Plan- basics and tips

    Hi.

    Writing a plan is commendable.

    However Im afraid it WONT make you a successful trader.No matter how good it is and how much it conforms with modern theory.
    Fundamental Or Technical,Discretionary or systematic.

    Unless you KNOW that your plan has a Positive expectancy,you could be trading a method which could cost you a fortune.

    So after devising your plan unless you can PROVE to yourself that your Risk reward ratio is greater than 1.5 (Should be around 4 ) Thats 4X return against amount risked AND your Winning trades to losing trades relative to your Risk reward ratio returns a positive expectancy(PROFIT),your no better off than having NO PLAN at all!

    Seriously this isnt gobbldy gok this is seriously the MISSING link for most traders.The 3% who do trade profitably,CONSISTANTLY know this!

    Learn all you can about this and how you can relate it to YOUR plan.

    tech
     
  6. GreatPig

    GreatPig Pigs In Space

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    Re: Trading Plan- basics and tips

    Which is where backtesting is useful for technical analysts. While past performance is never a guarantee of future performance, it does at least show that the plan can make money using real prices.

    Not sure how you'd do this with fundamental analysis though.

    GP
     
  7. tech/a

    tech/a No Ordinary Duck

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    Re: Trading Plan- basics and tips

    GP.

    Theoretically youd have to do it the same way.

    There is as much fundamental Theory when it comes to trading as there is technical.

    Fundamental analysis is more benificial in finding the stocks to place in your universe of stocks to trade.
    Youll have no doubt heard of Top Down Analysis.(Which incidently I have spent hrs trying to define an edge with this analysis-----fraid I cant find one)
    Which for those who dont know is the theory of trading the strongest index and the strongest stock/s in that index/es.

    The combination of Fundamental analysis for selection of universe of stocks to trade and then the introduction of Technical analysis to time entry , exit, and stop placement then gives you the ability to define expectancy.

    Without this your limited to hand testing Fundamental theory and as the sample of trade information will be limited due to limits on time and resourses the results will be questionable.

    Take the Fundamental theory of trading stocks only with low PE's.
    This is a theory and fundamentally a good one.
    BUT does anyone know how that has performed on ALL stocks with low PE's over the last 8 yrs?
    Well if you dont know you shouldnt take it as gospel.let alone place $100K in your portfolio on these stocks.
    WORSE $10K if your net worth is $15K.

    Same goes for any technical setup!!!!

    tech
     
  8. RichKid

    RichKid PlanYourTrade > TradeYourPlan

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    Re: Trading Plan- basics and tips

    What exactly is Risk to Reward Ratio? I have a feeling I've misunderstood but this is what I have in mind when I decide whether to enter (don't laugh if it sounds absurd!, I'm still learning this stuff).

    If I find a stock I like (various reasons) I look for support and enter above it or join the trend if it's strong. I will use DES Destra as an example since I'm following it and the price is at where I entered (12c). I saw a review at Aegis equity review, eyeballed the chart, noticed the reason for the fall (so a recovery in play), saw the rounding bottom and corresponding volume. Watched it break the resistance at 10.5c.

    This is where I made a mistake (due to emotion). I saw it sail upwards that day and panicked (got greedy) thinking I'd miss out so I bought at 12c instead of waiting to see how it settled, as I normally do, there was high volume though. Anyway, the resistance at 10.5c held but I could easily have bought lower than at 12c. My target is about 15c.

    This is how I work out my risk to return. I bought at 12c so the percentage risk is worked out via the change in the entry price. Hence if it falls from 12 to 10.5 (Support) It's fallen 1.5c which is a 12.5% fall. I would activate my stop loss and sell if it broke 10.5c or look to sell at that price if signs are bearish, I can always buy in later. As it was I held as I saw support continuing.

    So that's the downside percentage risk for me according to price (ie 12.5% loss). Now for the upside. I see the next major resistance level at 15c. So I estimate a possible profit based on the percentage rise from 12c (entry price). Which is 3c divided by 12c x 100 = 25%.

    My ratio is simply 12.5%:25% (which is 1:2).

    Overall things which could go wrong include slippage (ie not geing able to sell at 10.5c once it was broken) and a stronger resistance level appearing before 15c.

    Once the price gets to 15c I will most likely sell and wait for it to establish support above it and then decide whether to enter again.

    I try to aim for a risk to reward ration of 1:3 but if a stock has other reasons for being attractive (eg fundamentals for Destra suggests a recovery as the reasons for the sell down wont continue, stable business model and cashflow is to increase next quarter) then I may enter at 1:2.

    So basically I don't expect to lose all my money, just a bit of it and I try to have 3 times as much upside as downside on a percentage basis. Liquidity is also important to ensure I have takers for the price I want.

    Hope this method is understandable even if you don't agree with it.

    I have included a chart here for convenience, there's a shorter term chart at the Destra thread showing the rounding bottom in more detail https://www.aussiestockforums.com/forums/showthread.php?t=578
     

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  9. tech/a

    tech/a No Ordinary Duck

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    Re: Trading Plan- basics and tips

    RK.

    Excellent you have a grasp of R/R on a SINGULAR basis.

    Now where most have no idea is on a long term basis on all trades they take.
    Its knowing in advance that by trading a particular way/method/system,that your TOTAL trading has a positive expectancy.

    Being Nett wins and Nett Losses = a positive return.
    Now to do that you dont necesserily have to have more than 50% wins.

    Compounding the problem discretionary traders normally alter their R/R on EACH trade.
    Worse they miss a stop and the R/R for that trade and every other before it goes out the window----as the calculation is based upon every trade.

    How you trade and what setups you use are of no consequence when determining wether what you do is profitable.
    tech

    tech
     
  10. RichKid

    RichKid PlanYourTrade > TradeYourPlan

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    Re: Trading Plan- basics and tips

    Glad I'm roughly on the right track. And yes, I'm still working out the overall risk to return strategy. A lot more work before I get anywhere. Thanks again for your critical and constructive views TechA, it's much appreciated!
     
  11. wayneL

    wayneL Rotaredom

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    Re: Trading Plan- basics and tips

    >>Compounding the problem discretionary traders normally alter their R/R on EACH trade.
    Worse they miss a stop and the R/R for that trade and every other before it goes out the window----as the calculation is based upon every trade.<<

    Bull****! What you are describing here is an undisiplined trader, not a discretionary one, and is a slight on discretionary traders

    Mechanical traders still need the disipline to exersize their stop.

    Discretionary ones likewise still have inviolable rules they adhere to.

    Tech, you really need to get out more! The whole universe of traders is not contained within reef, here and other forums.

    You obviously would be surprised how many successful discretionary traders there are.
     
  12. tech/a

    tech/a No Ordinary Duck

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    Re: Trading Plan- basics and tips

    Wayne.

    Do you really think that disiplined discretionary traders form the majority!

    Most do have rules and they alter with each trade.
    Some will use a price action for one trade a support/resistance for another,or an oscillator for another.
    Often a combination of all three.

    Disiplined Disctretionary traders are rare.
    Disipline doesnt guarentee Profit for discretionary or mechanical traders.Only knowledge of the results of your disiplined discretionary trading/mechanical methodology can tell you that.
    Wether that be historical or actual results over time.

    I would be suprised Wayne Im yet to find ONE!!!!

    Ill keep saying it Im sure they are out there and Im sure that they are in a very very small minority particularly returning consistant profit over 2 or more years-------I havent found one and they havent been rushing from here or Reef to prove me wrong either.

    That in itself proves a point I think.
    Hell if someone questioned Longer Term trading like I question short term discretionary trading Im sure there are atleast 3 of us who would step up to bat!

    Whats the big deal asking for varification?
    Seems I ask the questions that others wish they had.

    Authenticator of Myth------------hahaha I love that!

    tech
     
  13. wayneL

    wayneL Rotaredom

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    Re: Trading Plan- basics and tips

    Well, I can't really say more than Ive said already re discretionary trading.

    Perhaps we have slightly differing perceptions of what discretion means.

    I will have to concede that many disc. traders have no rules whatsoever. These are usually beginners....they won't last long enough to be considered seasoned traders.

    BUT all discretionary traders I hang out with on MIRC are highly disiplined and in fact have CLEAR and INVIOLABLE rules and will not trade unless the precise setup presents itself. They have to be otherwise they would never have become seasoned. Mostly these are MOMENTUM traders with some REVERSAL traders. The discretion bit comes in when deciding to take the trade or not...and when to exit.

    However it all comes down to the most cliched of the trading cliches...Cut losers and let winners run.

    What we are looking for is some evidence than a momentum move or a reversal MAY have begun. We are looking to enter BEFORE the rest of the world jumps on the move. This is imortant for two reasons 1/ the stop is set very close to the entry 2/ the later the entry, the less potential movement to the upcoming exit according to criteria.

    Pretty basic stuff really.

    Is is so hard to believe that a discretionary trader can set a stop to limit losses and to allow winners to develop to a target or some other exit criteria?

    Is it too hard to believe that winners vs losers could be somewhere between 40%-60%?

    Is it too hard to believe that risk vs reward could be anywhere between 1.5:1 to 5:1?

    I don't think this is impossible to believe!

    We could enter randomly and achieve the above!
     
  14. tech/a

    tech/a No Ordinary Duck

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    Re: Trading Plan- basics and tips

    Wayne.

    You and those who trade the way you have described are way beyond the Discretionary trader.
    Infact Id say your systematic in approach with a discretionary element youve gone way past my interpretation of a discretionary trader.

    ((I cant opperate the quote thingy%$#&.))



    Is is so hard to believe that a discretionary trader can set a stop to limit losses and to allow winners to develop to a target or some other exit criteria?

    Is it too hard to believe that winners vs losers could be somewhere between 40%-60%?

    Is it too hard to believe that risk vs reward could be anywhere between 1.5:1 to 5:1?

    I don't think this is impossible to believe!

    We could enter randomly and achieve the above!


    Anyway.

    In answer NO ITS NOT but this is WAY beyond the discretionary trader.
    You seem to have understood and applied positive expectancy you have and do your NUMBERS and you understand where your success comes from----------------and its NOT your method of trading-------------Its the ABILITY to turn POSITIVE NUMBERS CONSISTANTLY.

    How many understand that!!-------3% I believe.

    Common ground perhaps!

    tech
     
  15. Garpal Gumnut

    Garpal Gumnut

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    Jeez, I miss tech/a's take on trading systems, cash and trade management.

    Lets hope he writes a book one day.

    Pure gold.

    gg
     
  16. Wysiwyg

    Wysiwyg Everyone wants money

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    Yes any Trading Plan advice would be well received.

    Know when to be trading in the market place and when not to be trading in the market place.




    .
     
  17. Garpal Gumnut

    Garpal Gumnut

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    Agreed,

    My plan is to get out atm (today) and wait for the double bottom or a breach of 5 on the XAO.

    Simple but it suits me atm.

    Sectors I'll leave until it happens, then individual stocks.

    Any thoughts?

    gg
     
  18. Ashsaege

    Ashsaege

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    your plan is to get out of the markets now? What happens if we dont get a double bottom?
    Im doing the exact opposite. To me the risk is not being involved. The market has currently been going north. If it reverses then my system will take me out and protect my captial.
     
  19. Garpal Gumnut

    Garpal Gumnut

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    One does not have to be in the markets to profit from their movements.

    I believe a major retracement is on the way. This is a belief. I have no evidence for this.

    As I said in my post I will be back in, if it does not eventuate and the XAO moves up through 5000 with confirmation.

    Simple as that.

    gg
     
  20. Wysiwyg

    Wysiwyg Everyone wants money

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    The stock universe one will be trading in is important when designing a trading plan? For instance if we include stocks under a certain price or turnover; during testing the results may be very misleading.
     
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