CREATING A TRADING PLAN WITH A TRADING STRATEGY
Most traders will never create a trading plan. They may risk more money in the markets than they ever will in any other business. However, they’ll never create a plan like they would if they were starting a business.
WHAT IS A TRADING PLAN?
A trading plan is a roadmap for what you are going to do in the markets. It will tell you things like:
- Your strategy
- Criteria for entries
- Stop-loss levels
- Amount of account per position
- Max loss levels
- When to trade
- When to take breaks
- Variables for success or failure
- Trade management rules
- Exit criteria
All of these will help you in the heat of the moment to stay true to your plan. It is crucial to work out your plan long before you trade real money. In fact, we recommend documenting your trading plan as part of your trade book.
You trading plan should include any and all relevant data that pertains to your trading day. However, to get this data, you must first know what to track. Once you have determined a subset of trades to track, you can add as many criteria as you want.
CREATING A CONSISTENT TRADING PLAN
In order to be consistent in the market, you need to have a detailed trading plan and keep it updated. Discipline is the number one factor that will affect your P/L in the market. You can have all the setups in the world, but sticking to your trading plan is what will give you consistency.
To help you with creating your own trading plan, we’ve created a list of 10 items that will be important to include. You can tweak this to your own likes and dislikes. However, make sure you can stay in your lane and stick to this trading plan in order to be consistent.
- How Many Trades will You Use to Evaluate Your Performance?
- Identify Your Key Performance Metrics
- What Time of Day Will You Trade?
- Define Your Trading Edge
- Identify Stocks to Trade
- Place Your Stop Loss
- When to Exit
- How Much Money Can You Use per Trade?
- When to Take Breaks
- Limit Up/Limit Down
Sample Trading Plan
Once you put it all together, you should be able to write down the data you need. To help you visualize this, we’ve put together a sample trading plan for you.
TRADE MANAGEMENT STRATEGIES
Trade management is very important, but also subjective. We like to simplify it into two camps: the discretionary camp and the systematic trading camp.
In the discretionary trade management camp, managing your trade depends largely on price action, volume, and the character of the stock. Along those lines, you might ask yourself the following questions to create a trade management strategy:
- Is this stock breaking out on heavy volume expansion?
- What does the trend look like?
- Should you add on a pullback to a moving average or support level?
- Does price and volume contract on pullbacks?
- What are some logical target areas overhead?
- Is there enough momentum to carry the stock higher?
All of these are just suggestions but should be going through your mind as a discretionary trader. It will help with how you manage your trade, make adjustments, and take profits.
In the systematic trading camp, there is more of an appeal to risk versus reward. In other words, many systematic traders will take profits at specified reward levels despite the price action of the stock.
There are drawbacks to this if the stock continues higher. But, it can also be a way to mitigate emotional trading that many discretionary traders succumb to.
WHAT ARE STOCK GURU STRATEGIES?
The trading world is chocked full of gurus. You really have to be careful who you follow. Some gurus will flash money and big profits at you like it’s easy to come by. Others will alert you to stock ideas only to sell you their shares when you (their followers) drive the stock price up.
However, there are some gurus’ strategies that are worth learning. We try to profile quality educators and gurus on our podcast, the SimCast regularly. Like with any new hobby or job, you should take what you can from whomever you can. Toss out the bad stuff, and keep what works for you.
HOW TO USE GURU STRATEGIES?
The best way to use guru strategies is to test them first. If you have a guru who touts a certain strategy, get in the simulator and trade that strategy for a large subset of trades first. Determine your outcome criteria, and then you will know how well it works or not.
You may also find that many guru strategies are just renamed. Many gurus want to coin their own strategies for marketing purposes, but they are really just old, tried and tested techniques with a new name. For that reason, we suggest starting with classic technical analysis strategies and trading patterns before you spend a bunch of money on gurus.
Lastly, we would just point out that you need to develop your own strategies to be successful. The best traders are good observers and reviewers. They observe patterns over time through implicit learning and remember them. This is key to understanding market dynamics. Relying too heavily on a guru will only handicap your performance over time.
OUR TWO FAVORITE GURU STRATEGIES
If we had to pick our top two guru strategies for beginners, we’d go with one long strategy and two that can go either way. This way, if you find yourself in any kind of market, you can have a strategy to fit that market.
The Minervini Volatility Contraction Pattern
The Volatility Contraction Pattern, or VCP, as it has come to be known, has been popularized by Mark Minervini in his books Think and Trade Like a Champion and Trade Like a Stock Market Wizard. Despite the pattern’s success for swing trading, it can be very useful in day trading as well.
The VCP, which dates back to Richard D. Wyckoff’s “wave pattern,” carries a high rate of success when executed properly. It essentially looks like a bull flag.
Many successful traders may refer to the pattern as simply a “high tight flag.” However, that pattern implies certain criteria that may not fit the VCP. You can see from the image above that it helps traders define their risks while offering exponential returns.
The VWAP Boulevard Trading Strategy
Since sharing the strategy with the community, thousands of day traders are now implementing this strategy to trade momentum stocks.
Here are the basics on what to look for with the VWAP boulevard strategy:
- Find the VWAP from large volume days on a chart
- Identify their daily VWAP levels on those days
- Draw a line on your chart
And that’s pretty much the gist of it. Obviously, there is more to it, and we cover that in our ultimate guide to VWAP boulevard. But, for all intents and purposes, this level can become a key support or resistance level for your current trading day. This allows you to go long or short depending on the price action at that level.