Trading Plan Step 1 – It’s All About You
First instalment of building a trading plan. Some of you might think the questions are a bit corny but, having gone through this process, it’s amazing how much you will learn about yourself and your approach to the market if you start writing things down. When I did it, many years ago, I found that my answers took me in a different direction than I thought they would and helped me to clarify my purpose and how I was going to get to where I wanted to go.
Question 1 – Why do you want to be a trader?
This question is designed to help you pinpoint your true reasons engaging in trading, i.e. it’s unlikely it’s just about the money. By pinpointing these reasons, you will be better prepared to answer the questions that come later regarding risk tolerance, etc. You should be able to complete all of the sentences below;
- I want to be a trader because…
- My number one goal in becoming a trader is…
- My secondary goal(s) in becoming a trader are…
- These goals are important to me because…
- I believe I can fulfil these goals by…
Question 2 – What sort of trader do you want to be?
There are many types of trading and, therefore, trader. If you are not familiar with some of the terms listed below, then that’s probably a pretty good sign that you still have plenty of research to do. What type of trader you want to be will largely be determined by the amount of time you are able to devote to trading. For example, you will not be a day trader if you spend 9-5 working away from a computer (unless you plan on trading US markets at night and never sleeping). Generally speaking, day traders will spend all day glued to the computer screen, watching their positions, whilst position traders may only devote a very small amount of time each day to the markets.
I will be a position/swing/trend trader…
I will be a discretionary/systematic trader…
My style is aggressive (which means I will likely be an intraday trader) or conservative (which means I will likely be an end of day swing trader)
Question 3 – What are your strengths and weaknesses?
Here you should list each of your character traits (both good and bad) and divide them into what you think are strengths and weaknesses. Try to think outside the box when constructing this list and look to your previous life experiences and background for clues. Are you a conservative driver who doesn’t like driving fast? Or you a thrill-seeker who likes to act on impulse? Maybe you are super organised at work, almost to the point of being obsessive-compulsive? If you think about it, all of the traits I just mentioned could be perceived and both strengths and weaknesses. When thinking about the traits, think about how they might affect your decision making, risk profile, organisation, etc. If you are still struggling, try paper-trading for a while to see how you will react in certain situations. Patterns will begin to emerge which will help you to identify your strengths and weaknesses.
My most valuable strength is…
How do I think this strength will help in my trading?
My biggest weakness is…
How do I think this weakness will impact my trading?
Question 4 – Do you have the right mindset to be trading?
This is really a two-part question. The first part involves your general situation. Are you currently at a point in your life where your situation is conducive to trading? Trading can be quite stressful in and of itself, so it should not be lumped in with other significant stresses in your life. Is everything OK at home? Have you recently lost your job? Does someone close to you have a serious illness? Are you always worried about your kids? Trading requires a significant degree of mental strength so if you are currently faced with any of these or similar issues, maybe it’s best to put your trading career off for a while. The market isn’t going anywhere and you can come back to it at any time. The second part of the question concerns the specific instances when you are going to be trading. Have you slept well the night before? Are you fit and healthy and mentally alert, or, have you been out boozing all night and have a headache? Remember, trading requires focus and mental strength.
I will only trade when…
I will not trade when…
Next – Set Some Goals
Chris Conway has been working in the financial services industry for more than 10 years, primarily as an equity analyst. He is passionate about both fundamental and technical analysis, believing that a combination of the two yields the best performance returns. A regular market commentator, Chris appears frequently on Ausbiz and is regularly quoted in The Financial Review, The Age and Sydney Morning Herald, Reuters and The Australian.
With his rules-based approach to markets and passion for technical analysis, Chris looks after the Technical Trades section of the Marcus Today Newsletter.
