Options trading plan example
Are you good at reading financial statements? Do you prefer getting in and out of positions quickly, or do you prefer having smaller positions with wider stop-losses? Think about the previous trades that you have made and try to remember what you found easy and what you have found hard. When writing out what type of trader you would like to be, make sure to give yourself an easier chance of replicating what you have previously found easy. There are 4 main types of trader; Scalping, day-trading, Swing trading and position trading.
Ask a close friend or family member to tell you what they think your strengths and weaknesses are. If they tell you that you are not good under pressure…. If they tell you that you are highly disciplined, good for you…you might want to plan on being a day-trader. If you are analytical it might be worth planning on being a swing or position trader. The type of trader you plan on becoming will determine to some extent the markets that you are able to trade.
A position trader will be able to look at a large number of markets whereas a scalper might only have the time to look at one. As you probably know, I trade mechanical trading strategies and this enables me to analyse a wide range of markets in a very short time.
If you are a discretionary trader you will obviously need to focus on a more refined number of markets. Think how accessible the markets you plan on trading are too. If you want to trade American Penny Stocks, will you be able to access charts for them? Are the spreads and commissions too large for your account?
If you are spread-betting you might find that the spreads on certain futures markets are too large. Think about what you would like to trade…but make sure it is practical. This is related to the type of trader you have planned on becoming. If your trading plan is to become a day-trader then you should specify the charts you will look at.
This could be a 4 hr Chart to gauge the medium term trend, a 1 hr chart to gauge the short-term trend and a 15 min chart for your entries and exits.
If your trading plan is to become a Swing trader you might specify that you will look at weekly charts for the long-term trend and use daily charts for your entries and exits. The main considerations that need to be made are firstly what the financial strength and ownership structure of the broker is. Brokerages do go bust! If you can choose a broker that is listed on a public stock exchange you will greatly improve the odds that you broker is financially sound.
If the broker you choose is based in the Cayman Islands and owned by one or two people…I advise you to steer clear of it, regardless of the perks that they offer. If you want to trade FTSE stocks…look for the brokers that offer the most competitive spreads. If you want to trade futures it is probably best that you find a broker that offers Mini-contracts.
If you have a small account and want to trade Forex, make sure that you find a broker that offers Mini or even Micro-lots. If your trading plan is to be a swing trader that uses Moving Averages, make sure that they are provided with the charts. If you intend on being a discretionary trader it might be worth looking for a broker that provides fundamental data on the markets that you plan to trade. The last consideration should be the perks offered by the broker.
The most important things to consider are how much you are willing to risk on each trade, what your entry signal will be and what your exit strategy will be. It is also worth thinking about whether you only want to trade the long side, the short side or both. Further questions to ask yourself include….
Will you increase your position size if the account is up or will you decrease your position size if the account is down? Test any strategy before taking it live. Your daily trading routine will be largely determined by your chosen trading style and time-frame. The shorter the time-frame you have decided to trade, the more planning and work is required.
It felt as if I did enough day-trading to last a life-time at our old Prop-Firm , so I am predominantly a long term-trader. Having said that, I know that many of you would like to be day-traders. Most of the following points are for you. As I write this article Ben Bernanke is deciding whether to extend the Feds Bond Buying program…Trust me that professional day-traders plan on being mostly flat going into any Fed statements regarding Quantitative Easing.
On days with important news releases make part of your trading plan to exit all trades 10 mins before the release and re-enter if your rules permit once the statement or figures have been released. In other words for intraday traders, trade all day every day or trade for x-dollar profit and call it a day until next session. Common logic coupled with human greed points to the fact that some sessions or periods offer outsized profit potential. Then there is the aspect of judging trader performance based on potential profit opportunity.
All true to various extents. But no trading career is ever based on extreme market conditions. High volatility and large-range sessions are a welcome gift when presented.
A brief, welcomed gift. What if we opted to construct a business plan based on steady, consistent performance objectives that are reasonable to meet on a regular basis?
Instead of grading our performance relative to max potential gains every day, what if we graded performance on achieving reasonable goals averaged consistently over extended periods of time?
Needless to say, just about everyone has toyed with a progressive table at one time or another and pondered possibilities. How much fun that would be. What if we held ourselves accountable to the concept of steady, consistent performance unattached to market behavior? If so, would it make sense to judge our individual performance against any other measure? Too many times a trader will be their own worst boss when it comes to judging performance. Holding oneself accountable to unreasonable standards only leads to one end: On the other hand, if we can visually see that small to modest incremental growth does lead to potential results acceptable enough in the end, that can serve as a guideline of measure to keep us grounded.