Well, it is a new year and time to revisit your trading plans.  Normally I would not post mine, but this year I thought I would share my plan.  This is not because my trading plan is that special or secret, but because my blog finally has enough content on it to back up my plan.

Why write a plan?

There is an often quoted statistic that 90% of traders fail and that the 10% who succeed all have trading plans. Whether that is true or not, we don’t actually know because no one has the data on trading plans. However, I personally feel that trading plans are a necessary evil as they force you to commit pen to paper and think more about your trading more deeply. Furthermore, by having a trading plan it gives you definite answers about what you should do when you account is 30% down and you are sweating bullets.

About this plan

When reading this plan, there are a couple of points to note:

• Sometimes I am quite brief, to help the reader understand my viewpoint better I have included links to relevant articles on my blog;
• There are some parts of my plan which I don’t like to share, so the plan may be vague in places, but there should be enough here to give you some food for thought; and
• This is my trading plan – it suits me and my personal situation – and most likely yours is different. So, by all means feel free to use stuff here to inspire you, but you really really need to develop your own personalized plan

My Trading Plan

Why am I Trading?

I am trading, rather than undertaking other forms of making money, because I am passionate about trading. My primary motivation is to use trading as an active form of investment to eventually provide me with:

• In the short term, some additional income;
• Eventually, a form of financial freedom where I have the flexibility of choosing not to be employed (if I want to) and know that I can support myself and my family quite comfortably;
• Ultimately, a way of contributing to other more passive forms of investments (such as managed funds, rental properties, etc), so that in the longer term I even have the option of stepping away from active investing

For more information, see my related blog article on “Why are You Trading?“

Profit Aspirations

The number one objective of trading is the “bottom line”.  It is not about who has the coolest blog, what arcane facts you know about trading, whether you predicted the top or the bottom, or if you won an argument on a forum, or what have you. At the end of the day it is about profit.

From a profitability perspective, I aspire for professional levels of return (i.e. around 60% per annum). I  recognize that I will not be able to achieve such returns without taking on risk and sometimes I will not be able to achieve that from the market.

For more information, see my related blog article on “Performance Expectations” and “Estimating Time Till Financial Freedom“

Trading Method

Principles

In order to meet my objectives I will need to:

1. Stick to my trading plan
2. Always trade with an edge
3. Compound my account
4. Manage risk
5. Manage my time effectively
6. Work on my Psychology
7. Operate my trading as a proper business
8. Undertake Continuous Improvement
9. Undertake a process of continuous elimination and remove those things from my trading that dont help me make money
   

Trading Style and my Edge

I am inspired by how macro hedge funds trade, which work on making 3 to 4 major macro trades per year and many smaller bread and butter style trades. To do this I will use two forms of trading:

• Regular automated systems trading for extracting regular profits out of the market by exploiting repeated patterns in the market; and
• Occasional discretionary position trading to benefit from some major macro – driven trends

For related blog articles on getting an edge, see my posts on “Getting an Edge in Trading” and “Investment“. For more information on automated systems trading, read my blog articles on “My experiences with automated trading” and “Project 10“.

Markets

I currently specialise in foreign exchange. In the future I may branch out into equities, futures, options, etc. For now, I primarily trade the majors, commodity currencies, cross rates and occasionally the exotics.

For related blog article, see my posts on: “Why Trade Currencies” and “What Moves the Currency Markets?“

Analysis Methods for Identifying Entries, Exits and Reading the Market in General

To help me find appropriate trading opportunities, I am a big believer mixing fundamental, technical and sentiment analysis. My approach to using these methods are best explained in my blog articles listed below:

• Fundamentals: Macroeconomics 101 for Traders and Fed Watching
• Technical Analysis: Characterizing Trends; Picking Tops and Bottoms and Breakout Trading
• Sentiment Analysis: Trading Sentiment

Risk Management

In order to ensure long term survival I will:

• Always trade according to market conditions:
  • This means I need to understanding the strengths and weaknesses of my trading systems and constantly monitor the markets, so that I know when to trim my risk profile, when to cut positions and when to “press the trade”;
• Apply Effective Money management:
  • I only trade with risk capital where it is enough money that makes trading worthwhile, but if you lost it you would not put your family at risk;
  • I will ensure my account is sufficiently capitalized to meet my profit objectives and survive a string of losses;
  • I will adopt a conservative approach to compounding and at the end of each month I will withdraw 50% of my profits to ensure that if my account ever blows up, I will still have something to show for it;
  • I will try and build a portfolio of uncorrelated systems and positions;
  • I start cutting risk as quickly as possible if my portfolio heat (i.e. drawdown) exceeds 10% and never let it get beyond 34% (i.e. start trimming positions before that happens);
  • If I realize a loss of more than 34% of your peak of my equity curve, then it is time to stop trading all together and revisit my trading plan in detail;
  • I always understand the source of risk of ruin in my systems, and position size accordingly;
  • Never trade martingale systems – the risk isn’t worth it
• Trade management techniques (e.g. around stops, hedging, pyramiding, etc):
  • I always trade with stops that ideally reflect market conditions (unless I am actively hedging);
• Manage other major risks, including:
  • Ensure that I have appropriate backup, security, virus protection on my computer systems
  • Have alternative network arrangements and a backup computer
  • Split my money across multiple brokers, in case of broker failure
  • Ensuring my wife knows how to close my positions and withdraw my money in case I get hit by a bus

For related articles on my blog, have a look at: “Trade Management“, “Preparing For the Worst“, “Risk vs. Uncertainty” and “Disaster Planning“.

Trading as a Business

I need to operate my trading as a business.  This includes meeting the requirements of the tax department to be treated as a trader rather than as an investor and operating under a sound trading plan (this document).

In order for my trading to be treated as a business (and therefore be entitled to tax deductions), the Australian Tax Office looks at 5 factors:

• the nature of the activities, particularly whether they have the purpose of profit making;
• the volume and regularity of the activities, and the similarity to other businesses in your industry;
• the keeping of books of accounts and records of trading stock, business premises, licences or qualifications, a registered business name and an Australian Business Number;
• the volume of the operations; and
• the amount of capital employed

I have sought advice from an accountant who has experience with trading on how to do this.

For related articles on my blog, have a look at “Trading and Tax (Part 1)” and “Trading and Tax (Part 2)“.

Psychology

I will try and make sure my emotions don’t interfere with my trading. I need to be vigilant of greed, fear and in particular the need to be “right”.  Also, I need to be wary of how human decision making biases (e.g. the irrational escalation of commitment, representativeness, anchoring, etc) can affect your trading . Lastly, I need to remember to put my family and work (in that order) ahead of trading, as a a happy life outside of trading is the key to successful trading.

For related articles on my blog, have a look at: “Trading Psychology 101” and “Behavioral Finance”

Routine

Trading effectively requires consistency. The best way to ensure consistency is to establish a routine. My routine involves:

• Monday – Friday: Monitor markets and place/manage trades as per plan
• Weekend: Analyze trading logs, Review charts, Catch up on the fundamental reports and undertake research on new trading methods and systems, etc
  
• Annually: Take some time out to review trading plan and undertake some courses

I will try and develop a trading plan to fit around my life . I don’t want to fit my life around the trading plan.

Monitoring Trading Performance

Regularly monitoring your trading performance is one of the many keys to successful trading. In analyzing my trading logs, I look at:

• Profit / Loss
• Win / Loss Ratios
• Average Win size / average loss size
• Maximum win size / maximum loss size
• Best performing currency pairs
• Best performing days of week or hour of day for entry
• Drawdown
• Risk of Ruin

Trading Tools

Computer

• 2 Computers (1 primary computer and 1 backup)
• Remotely hosted 24/7 windows server for managing automated trading systems using a dedicated VPS managed by a trader friendly company
• External backup, undertaken using incremental hourly backups
• Antivirus, Double Firewalls, 2 factor authentication
• Redundant network connections (ADSL and Wireless Broadband)

Trading Software

• Meta trader 4 charting / back testing / trading package
• Automated Trading systems
  
• ForexControlCentre (Trading Log Analysis Software)
• RiskAmp (Excel Monte Carlo Simulator for doing scenario analysis)

Brokers

• Accounts are split across 2 brokers to minimize broker failure risks

Subscriptions

• Market Club
• Currently evaluating Forex Mentor COT Report Service
  

This entry was posted on Friday, January 9th, 2009 at 10:58 pm and is filed under Trading Plan. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.