What is a Trading Plan ? and Why You Need One?

How do you make money without picking tops and bottoms?

I am glad you asked...

Successful trading is similar to a successful business. You see, every successful business has a business plan so do successful traders. The astute reader knows that, successful traders have a systematic way they approach the market.

The definition of a trading system is a trader's business plan; it defines your approach to trading...

1. A properly constructed trading system will leave no room for human judgment
2. It will define your actions given any circumstances that may arise.
3. It is a distinct set of rules
4. Which instructs the trader what to do and when to do it.

The importance of this trading plan cannot be understated. Without a consistent set of guiding principles to govern your trading decisions, most traders will hop from one trade to the next, guided by emotion or hysteria.

I firmly believe that not having a plan, you are doomed to fail.

Trading systems themselves will come in many varieties, although they all take the guesswork out of trading. A trading system will determine for you when to buy or sell. System trading has proven itself consistently to be the most effective long-term trading technique.

In fact, you may have even heard the story about one of the most famous system traders of all time, Richard Dennis. It just so happened, in mid 1983, Dennis was having an ongoing dispute with his long time friend Bill Eckhardt about whether great traders were born or made. Dennis believed that trading could be broken down into a set of rules that others could learn. On the other hand, Eckhardt believed trading had more to do with innate instincts, and this skill comes naturally.

In order to settle the matter, Richard suggested that they recruit and train some traders and give them actual accounts to trade to see which one of them was correct. He named his protégés after visiting turtle farms in Singapore; he decided to grow traders similar to the way farmers cultivated turtles, hence the name: Turtles.

To cut a long story short, Dennis taught his trading methodology to these groups of students who later became some of the most successful traders of all time; proving finally, that anyone can become skilled at system trading.

Just like the turtles, I too have studied under a mentor who tutored me in the science of trading. Now, I pass these secrets on to you.

A trading system is simply a set of rules that address every aspect of a trade such as entry and exit conditions and money management. Regardless of how complex it may be, a good test for your trading plan is to hand it to someone else to read thoroughly. See if your selected candidate asks questions. If they can easily understand all the rules and the requirements of your strategy with little to no questions, then you have compiled a sound investment plan.

All successful traders that I meet do this and they have their exact trading methodology written down.

Since most traders lose money and do not have their trading methodology written down, does not it make sense to do what the masses are not doing? If you are trading now and have not taken the time to write out methodology, then stop trading and get it done!

Why is it so important? When you take time to sit down and spell out how you perceive the markets, you are accepting the fact that you might be wrong. You are beginning to accept responsibility. Once you write down how you perceive the market, the only conclusion you can arrive at, if the market does not behave according to what you wrote, is that your perception is wrong. When you write down how you are going to enter a trade, only if certain events transpire, you eliminate any possibility of blaming the market. You are forcing yourself to have discipline.

In other words, if you determined that certain bullish signs show up in your market then you enter into a long position. If these prior events occur, and you did not enter the trade, that failure is your fault.

The Components of Your Trading Plan:

A business plan has set components; so does a trading plan. In fact, there are three major components within any trading plan and they are entry, exits and money management rules; here is a quick summary:

1. Tested Entry Rules

-- Entry rules are a precise set of rules that an instrument must pass before you enter a trade. Entry rules should be simple, direct, and leave no room for human judgment.

2. Confidential Money Management Rules

-- Perhaps the most important and least addressed aspect of trading is the ability to manage risk. A profitable trader is one who has the ability to manage the risks associated with trading. A trading system should define exactly how much money you are willing to lose on any given trade.

3. Tested Exits Rules

-- Entering a share is all to no avail if you do not know when to exit a position. Having rules that defines your exit is equally important as one that defines your entry.

When you take time to write down your trading rules, you transform your mental reality to a physical reality. You cannot fudge the numbers, or avoid taking responsibility.

By writing down your methodology, you are forcing yourself to create a series of decisions based on how you see the markets and this my friend is just the beginning.

-=-=-==-=-=-=-==-=-=-=-=-=-=-=-=-=-=-=-
David Jenyns is recognized as the leading expert when it
comes to designing profitable trading systems.

His most recent course Ultimate Trading Systems is a step-
by-step trading roadmap to designing profitable trading
systems. Learn how *you* can become one of his students.
Click Here ==> http://www.ultimate-trading-systems.com

Receive David's free trading tips by sending a blank email to:
==> ultimate-trading-systems@getre sponse.com
-=-=-==-=-=-=-==-=-=-=-=-=-=-=-=-=-=-=-

---

Mutual Fund Commissions

You have heard about a particular mutual fund from a... Read More

Trading Baskets II: The Crapolio, A Roll of the Dice in the Stock Market

In a previously written article, we expanded the use of... Read More

Stock Market Investing: Knowing When (and when not) to Sell

One of the greatest challenges of investing in stocks is... Read More

401K-itis

Are you one of those many people who dread reading... Read More

Financial Crime

Congress recently passed another new law that is supposed to... Read More

Why Buy and Hold?

Since I can remember, and that's a long time ago,... Read More

Trading For A Living

How many times have you said to yourself, "I'd like... Read More

Stock Options Trading Strategies - Lean

Professional stock options traders use the term lean to refer... Read More

Mindset

In 1960 an engineer working for a watch company in... Read More

Bargain Basement - Finding Stocks That Go Up

Have you been listening to the talking heads on CNBC-TV?... Read More

Good Stock Market Tip; Good Return!

Forget making a profit; instead focus on the income provided... Read More

Successful Trading ? Taking Profits - Part 2

Suppose your position has made a big move and you... Read More

Two for the Money

Look back over the years and try to remember how... Read More

Market Globalization

Just 30 years ago the stock market was a shadow... Read More

Trading Systems

To become a successful trader you must have some kind... Read More

A Funny Thing Happened on the Way to the Stock Market

On the 40 year journey through the turmoil of a... Read More

Does Japan Matter?

For the last 12 years we have seen the Japanese... Read More

Wal-Mart: Discount Store, Discounted Stock?

As GuruFocus updates the stock buys and sells of gurus,... Read More

Traders, Defend Against the Dreaded Death Spiral.

It has often been said that there is only two... Read More

How to Pay Less and Get More: Discount Broker vs Professional

How do you invest? What do you really pay? At... Read More

Hedge Fund Advertising

Have you seen all those big full page ads for... Read More

3 Components Needed for Beating the Market

Time to look back2004 is over, now we are in... Read More

Mutual Funds: The Modern Den of Thieves!

Mutual funds were created with the idea that one person... Read More

Which Way The Market

I am hearing predictions by brokers, financial planners, talk show... Read More

Nest Eggs and Omelets

Do you have a nest egg? You know, a place... Read More

Option Spread Trading

Spread trading is a technique that can be used to... Read More

Inverted Interest Rates

Inverted interest rates? What's that? Who cares? Even if you... Read More

True Investment Road Maps

If you don't know where you are going any road... Read More

The Stock Market Doesnt Care if You are a Beginner?. Get Prepared to Succeed at Trading

Stock trading remains a very competitive field and the stock... Read More

What is a Trading Plan ? and Why You Need One?

How do you make money without picking tops and bottoms?I... Read More

Enronization

Even if you don't own any of their stock or... Read More

Emotional Maturity

If you are going to be a winner in the... Read More

Box Of Chocolates

Ever have one of those sample boxes of candy? Each... Read More