Trading Plan - Trade for a living, invest for life   
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Develop Your Trading Plans

Develop A Trading Plan For Stocks: I have given this part of the sitetrading plan writer Anna considerable thought as to the simplest way to help you develop your own trading plan. I have looked at many other sites and several books, and whilst they all suggest you have a plan with all the various elements, none give you a framework of the questions you need to ask, nor how to then convert this into a trading plan. In order to try to resolve this problem I have developed some hypothetical examples, which though they may not fit your precise circumstances, I hope they will give you enough detail to understand the issues you need to consider, and how the plan is then developed.

The examples are based on women but could equally be applied for the many men who I know visit my site regularly. I have therefore tried to make them 'non gender specific' by talking of partners rather than male/female which I hope isn't too confusing! I propose to lay each example out in the same way, with a brief synopsis of the age, lifestyle, work, dependants, personality etc which hopefully will make it more meaningful for you. In addition I propose to take each partner and look at the scenario from the other partner's perspective.

Trading Plans - Example Young Couple

For our first example let us assume the following :

Trading Plans - Partner B

Suppose that the couple have discussed the future and both agree that at some point in the next few years they would like to start a family. This naturally raises the question of losing one salary. Following various discussions they have agreed that partner B could take a part time job, or start a business from home, possibly on the internet in the first few years pre-school. Trading or investing is one of the options discussed and Partner A is keen, but Partner B is very nervous as this involves risk and has heard that most people lose money.

Partner A understands knowing that Partner B has a different personality and view of risk, and therefore suggests that they could start something now, to see how they get on, and yet still keep their existing income. In other words develop something on a trial basis, whilst both keeping their full time jobs. If it works out, then fine, if not, they can always try something else. This plan seems to make sense to Partner B as the only risk is in losing a little money in order to see if they can develop a separate income stream to replace one salary in due course. Having reached this decision the couple then have to try to decide what market to try. Clearly the markets that would suit Partner A, would probably not suit Partner B given that they have very different personalities. In addition, they will also have to consider the fact that they are both going to be at work during the day, so whatever they do consider and how they work, will have to fit in with their existing working arrangements and lifestyles. This seems to be an issue until Partner B suggests they look on the internet and buy some books on trading and investing which will hopefully give them a better understanding and some ideas.

Several weeks later and after looking at various markets and talking to friends and colleagues, some of whom are involved in the financial markets, they decide that a low risk approach to the markets would suit Partner B better given the personality and view of money and risk. Given that they have no experience of trading or investing they decide that they should start with low risk stocks and build their experience slowly. Hopefully in the next 3-5 years they will be able to build enough extra income to supplement their drop in salaries when they start a family. Even if this is not successful, they will hopefully be able to use their experience to try other markets.

They have been advised that day trading is not a sensible option and therefore this strategy seems to fit well with their overall plan as they can continue to work full time, but catch up with their trading in the evening using end of day data online. They both feel that this is a sensible start, and are now in a position to write the opening part of their online trading plan!

My Online Trading Plan - Partner B

My Overall Objective

In the next five years I plan to start a family. In order to help plan for my loss of salary, I have decided to begin trading in low risk markets to develop a small, but growing income stream which will be secondary at present, but which will be a replacement for part of my salary when I do leave my job. I will continue to keep working full time at present. My trading analysis and decisions will be done in the evenings and weekends.
 

The above states in simple terms the trading objectives for B. Anyone else would be able to pick up the plan and read it, and it would make sense. This is the yardstick by which you should judge your plan. If you could present it to someone else to read and it makes sense to them, then you have a reasonable plan. Having decided on and stated our overall objective in broad terms, the next issue we need to decide is how much money we plan to invest in the trading, and this will be intertwined with our overall plan for our earnings. To take a silly example, you could not expect to generate 100,000USD per year starting with 100 USD capital! So we have to take have a realistic approach to this issue. Now lets go back to A and B.

A and B are happy that they have made some progress and at least have some idea of how they ate going to develop this income stream in the next few years. However there is a along way to go before they have a completed trading plan. The next issue is how much money they think they will need. As new traders they have little idea on how much this should be given the markets they are trading. From their market research they have read about markets where you can start with a few hundred dollars, but these tend to be very high risk. They have also been advised that any money they use must be from savings, and must not be borrowed against the house or credit cards. In addition it must be money they can afford to lose, and should never be more than 10% of their total net worth.

Let's look at this in the context of the existing earnings and what we are trying to achieve. Partner B's salary is 75,000 USD per year - is it reasonable to consider replacing this completely in 5 years and if so how much capital would we need in order to achieve this scenario. Intuition should tell us that this is unlikely for several reasons.  Firstly we have already decided that this is a low risk approach given B's personality and view of risk. Given this is the case and it is low risk it would seem unlikely they would be comfortable investing the amount of capital required to generate this level, at least in the early stages with no experience, which could be ten times this amount. Remember that the average return for most fund managers is between 5% and 10%, which always begs the question if this is the case, why most people don't just put it in the bank!!

Clearly from the above there is an imbalance between B's current salary and what they are likely to feel comfortable trading in the market. So A and B decide to approach the issue from another angle. B checks the savings and they find they have 25,000 USD to use for the project.  B is very uncomfortable about using all their savings, and A suggest that as a start why not use half the amount, and see how they get on over the first few months. If things go well, then like a business they can always put more cash into the business after the initial "toe in the water" approach. Partner B agrees and feels re-assured that they are not risking all their savings, and they eventually decide to start with an initial 10,000 USD. Their objective is to start small and grow income slowly as they learn so this seems to fit within the plan. In addition, like a business plan they can always add cash and amend targets as their experience grows and they get a better understanding of the markets. So we now have the next part of our trading plan which is our strategy. We know how much we plan to invest and the markets we are going to invest in are blue chip stocks. They decide that they will only trade the long side of the market, and whilst this can have problems of its own, on balance this is probably safer as there would be other issues to consider such as a margin account. There are other ways to trade short and they will consider these once they have built a sound base of experience.

My Online Trading Plan - Partner B

My Objective

In the next five years I plan to start a family. In order to help plan for my loss of salary, I have decided to begin trading in low risk markets to develop a small, but growing income stream which will be secondary at present, but which will be a replacement for part of my salary when I do leave my job. I will continue to keep working full time at present. My trading analysis and decisions will be done in the evenings and weekends.

My Strategy

I plan to start my trading with a cash sum of 10,000 USD. If during the course of my initial trading, I exceed my targets then I will consider adding further funds in due course. I propose to trade in only blue chip stocks on the US markets whilst I learn the basics of trading. I will not be trading short but may consider this in future using other trading techniques.

Now the next part of the plan is a little more complicated and involves a decision on your part as to whether you propose to trade using fundamental data or technical analysis. If you click on the link here it will take you to the page on making bread which addresses this issue as the types of traders. This is a big subject and it is critical to your success that you decide which approach you favour. There is always an endless debate amongst traders as to which is more beneficial, but in most cases you will find that technical traders use fundamental data for part of their analysis, and visa versa. Now for the purpose of developing the plan, let's assume that Partner B proposes to use technical analysis as the primary trading style, so we can now write the next part of the plan.

My Online Trading Plan - Partner B

My Objective

In the next five years I plan to start a family. In order to help plan for my loss of salary, I have decided to begin trading in low risk markets to develop a small, but growing income stream which will be secondary at present, but which will be a replacement for part of my salary when I do leave my job. I will continue to keep working full time at present. My trading analysis and decisions will be done in the evenings and weekends.

My Strategy

I plan to start my trading with a cash sum of 10,000 USD. If during the course of my initial trading, I exceed my targets then I will consider adding further funds in due course. I propose to trade in only blue chip stocks on the US markets whilst I learn the basics of trading. I will not be trading short but may consider this in future using other trading techniques. I will use technical analysis as my predominant method for choosing stocks to trade.

OK  - now we are ready to start to put a little details into our online trading plan.

 

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