Beyond a Trading Plan

Beginners are taught the importance of developing a trading plan. The problem with a trading plan is that most trading plans will read like a wish-list. They are not likely to be based on facts or empirical evidence. Example of a well-intentioned but poor trading plan:

My plan is to trade the ES using tape reading/order flow. I will only trade the morning session. I will risk max 2 points per trade and will target to average $500 per day trading max 2 lots. I will take a max of 3 trades per day. I will risk max $300 per day.

But, what’s wrong with this trading plan?

  • Specific rules do not allow for adapting to changing market conditions.
  • Profit target is too big for the number of contracts traded and risk limit.
  • There is no “development” path. No end point or evaluation or target. It is not a work in progress but a wish list.

Let’s look at a better but similar plan. Instead of rules, we shift the focus to principles. We add targets and end points and we make the plan more realistic:

Markets Traded
I will focus primarily on the ES but will trade other equity index futures depending on volatility and opportunity. I will require at least 2 weeks of simulator experience or a system for any non equity index future.

Times Traded
I will primarily focus on the morning session and will later shift to strategy development, more conservative graybox trading, or sim trading.

Principles
I will trade in a disciplined way. Every trade will have a stop loss. I will not attempt to “load the boat” on a single trade whether it has a large edge or small edge. I will bet more on my best trades but in a disciplined and strictly controlled manner.  I will risk $750 per day and target 20%-40% return on risk or around $200-$250 per day. If I have closed profits over $200 on the day, I will become more conservative and may stop for the morning session and move to either simulator, research, or only take system trades.  I will focus on the morning session but will work on developing my ability to trade other times by working on new systems and processes. Depending on volatility and opportunity, I may break the day in up to 3 or 4 sessions with individual risk limits but will never risk more then my daily loss limit.

Scaling Plan
I will start with a maximum of 2 lots. Normal trades will be entered with 1 lot. High confidence trades with 2 lots. I will add an additional lot for every +$3,000 in profit.

Goals, Improvement, Revision
I will set a goal to work for something to work on every week. I will evaluate and score how I did on my goal every week. Every 30 days, I will re-evaluate my plan and revise as necessary.  I will develop new grayboxes and track my results with them.

Final Evaluation
After 90 days, I will do a serious evaluation to see if the plan is still working and will analyze critically ways to improve or adjust the plan to make it work better.


 

Ideally, you can make a sort of mini-plan or evaluation for every graybox or methodology you trade. Take ways:

  • Prefer principles over rules
  • Prefer goals over plans
  • Prefer making some money over losing money (don’t oversize!)
  • Use intuition where it works, trade ideas but keep it out of the money management (where it doesn’t work)
  • Be flexible
  • Evaluate and look for ways to improve
  • Be willing to fail a methodology without failing yourself.

 

 

 

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