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Mechanics of writing a plan


Ok, last week I promised to provide an example trading plan for this week’s blog post.  But you know what?  I don’t think my last two posts really set up the structure for what should be in a plan.  We talked about generic things and unrealistic goals.  I used fun exaggerations, like turning $1,000 into $1,000,000 in only 4 months, to make a point.

Let’s actually sit down and talk about goals.  I’m not going to give you any because without knowing more about your situation, I can’t.  I’m also not going to give you my goals, because that isn’t important at this point in the conversation.

So what are you going to give me?

I’m going to give you a format and a few more things to think about.  Then (maybe next week) I’ll eventually give you an example trading plan.  And, just for fun, I’m going to expand on my construction examples from the prior posts.

First let’s look at ourselves as traders.  We need to ask those important questions I alluded to last week.  Where are we?:    (Do I know how to hang drywall? Pound in nails? Plumb the water lines?)

  1.  Where am I in my trading career
  2. What is my average monthly return
  3. What is my average drawdown
  4. How long does it take me to recover from my drawdown
  5. What are my greatest strengths as a trader
  6. And what are my biggest weaknesses
  7. Have I tested my system (or philosophy) with enough rigor to determine its potential longevity

I’m sure I’m missing some questions, but this is a good start.  Next, let’s employ some of that, oh-so-difficult, introspection.  This includes timing, ability and desire.  I like percentage based goals, not dollar ones, but you can take your pick.  Ask yourself: (what kind of house can I build?  What are the restrictions on zoning?  What are the restrictions on my skill level)

  1. How much did I return in my account last month
  2. In the last 3 months
  3. (6 months anyone)
  4. How many hours do I spend in an average day or week looking at the markets
  5. How much money do I want to risk (in both my account and on a per trade basis)
  6. How do I want to define my risk capital (yes, this is different for everyone – more on that in a different post)

With this framework in place, we are probably ready to start talking about goals.  These are also personal so I’ll talk in generalities.

Again, this depends a lot on you.  Does your goal have a destination, or does it have a progression?  Either one is ok.

What I mean by that is do you have a 12 (or something) month goal for overall return?  Or do you have some sort of progressive increase as your goal?

I like the idea of having a long term goal and short term steps to help me get there.  The latter should lead to the former.  I like destinations, but you can figure out for yourself if you need one.

So, where do you want to be in 12 months?

Well, I think that given my current understanding and skill level, I can turn my $XX,XXX into $XXX,XXX in XX months.

Ok cool!  We’re finally starting to look at this thing like a business.  That’s a pretty good goal.

How are we gonna get there?

Well, I’m going to go surfing for the first 6 months, then make an XXX% return in the last month.

Oh nuts, we were doing so well there for a while.

That’s probably not a good plan.  That’s why I like interim goals to get to my long term goal.  I like to break these down into monthly and weekly goals.  Daily ones are a little short term for my taste.  But as always, pick ones that suit your taste.

Here’s something important:  Even if you’re new, try to have positive goals.  “my goal is to not lose money” is a bad goal.  This preconditions our mind for the expectation of failure.  Our brain gets a little freaked out when we throw all sorts of negatives and double negatives in the conversation. Try to have a positive goal.

Think of it this way.  Every time you place a trade you lose money as soon as you clicked the mouse.  I’m sure we all know what broker spread is.  If our goal is to “not lose money” we fail as soon as we enter the market.  That’s a lot of unnecessary self-imposed stress.  We need to realize that loses and spread are a costs of doing business.  If you had a store you would still have to pay for you inventory (look at this as if it were drawdown, or spread).  Sure you want to get the best and most affordable suppliers (most reliable and cheap broker), but you still have to pay to have a business.  So accept that you will have to pay to trade.

So what’s a good goal?

How about something like: this week or month, I want to return X%, or X pips.  << There, that’s a much better goal.

Of course you don’t want to lose money, but when we talk about this, lets form some sort of objective instead of a fear based goal.  How about something like: “I want to minimize my drawdown, or I want to limit my risk to XX.”  See how that is a much better goal than simply saying: “I want to not lose money”.

Let’s review:

  • We have identified our skill set
  • We have a destination
  • We have long term goals
  • We have obtainable short term steps to help us get to our goal

Sounds like we’re almost there

Here’s just three more topics that I like to have in a trading business plan.

  1. As with any business, I like to have an objective.  This isn’t financial or % based.  It’s something to guide your trading philosophy.
  2. We must consider things like risk management, drawdown
  3. Last, how much do you want to have tied up at a broker?  How big of an account do you want to have?  Do you have the discipline and risk management skills to make sure you don’t lose too much of this account?

Each of those require their own blog posts to discuss, so I won’t get into them right now, but make sure you include this in your plan.

Lastly, remember that your trading business plan isn’t the same as your trading plan (or trading strategy).  Oh boy, this means, more planning.  We’ve set the stage for treating trading as a business, but we haven’t defined how we’re going to make money yet.  Our trading strategy or trading plan is how we trade.  That’s a bit different from how we go about our trading business.

When do I get to start being lazy?

Not yet.  Ya, there’s a lot to this trading thing if we want to do it right.  On the other hand, if this all sounds like too much work, take the money in your trading account and use it to light a nice cigar.  Making money trading is hard work.  If we plan ahead we can do well over the long run, but we have to get off on the right foot.

Happy trading,


One Comment
  1. jim permalink

    another nice post. yes the trading business plan and trading strategy/plan are very diff. looking forward to your next post.

    going to review your site for background on your trading strategy

    thanks for your post

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