Developing A Trading Plan - Pt 1
Author: Jason Brumbalow

BEFORE YOU BEGIN TRADING - "Plan your trade and trade your
plan."

Before you even consider trading it is important to take the
time to seriously question your intentions in the market. Do
you see futures as the means to a quick profit? Are you trading
for excitement or a rush? Are you interested in trading because
you seek satisfaction on a purely intellectual level? Do you
see trading as a hobby or as an additional avenue of
investment? Are you looking for a way to fund early retirement
or do you see trading as an opportunity to augment your
savings? Do you need the profits that trading might bring to
cover debts or other financial commitments?

Many traders do not know why they want to be in the market. By
taking the time to honestly evaluate your reasons for trading,
not only will you learn more about yourself but you'll also be
forced to justify your commitment of hard earned capital to the
market. Remember if your rationale is floored so too will be
your trading. For those contemplating a career in futures
trading, the following provides a useful list of issues that
should be covered prior to entering the futures market and the
pitfalls that all too often cut short the career of an aspiring
futures trader.

2. Developing a written trading plan

When someone decides to start a business, the first task
usually tackled is drafting a business plan. Most people would
see this as mere common sense; however it seems the same logic
does not apply to MOST new traders. Rather than planning how
and where their capital is to be allocated, many new traders
will launch headlong into a trading career with little regard
as to their risk and profit objectives. By failing to have a
trading plan, a trader will not know what to do when the market
goes in their favor or worse still, when it moves against them.
Without the structure that a trading plan provides, you will
find yourself not only at the mercy of changing market
conditions but also of your own conflicting emotions -a sure
recipe for disaster.

Many surveys successful and experienced traders use a plan that
is consistent with their temperament and the amount of money
they have in their accounts. While a plan will not prevent
losses, at least it provides you with some guidelines to
follow. You can and should make minor adjustments to your
initial trading plan throughout the trading period, but do not
let the ups and downs of the market affect your overall game
plan. Do not abandon your original objective, unless the market
conditions that led you to place your trade change. The trading
plan therefore imposes the disciplined structure that is
essential for long term success.

A written trading plan helps keep you from making poorly
conceived, spontaneous, thoughtless, emotional trades. An
unwritten plan often gets changed when the trader's mood
changes. A written plan keeps you from many trading pitfalls
such as greed, fear, boredom, a need to be right, a need to be
a victim, and masochism. While a trading plan may contain many
elements, at minimum it should at least contain the following
characteristics:

1. Select your investment universe (ie. Futures market and the
contract/s FX markets and contracts)

2. Appropriate account size (capital you can afford to lose.
Allow for diversification). UNIT allocation based on the
trading model

3. Define your style of trading (aggressive, medium ,
conservative)

4. Define your time frame (day / short / medium / long term
trader)

5. Have specific 'Rules Of Engagement' (eg. DIV SOS 3)

6. Add risk management parameters stop loss (fixed dollar,
trailing, swing)

7. Outline your money management

1. How much to risk - percentage based on capital

2. Percentage of money to risk on each trade

3. Where to place stops

4. When to add to a winning position

5. When to liquidate part / all of a losing position (Stop
Placement)

6. When to liquidate part / all of a winning position (Profit
Target 1,2,3)

7. Profit objective for trade / week / month / year (including
MM)

8. Impact of commissions and fees on trades – individual and
overall

-- Slippage
-- Continuing Education
-- Subscriptions

9. Are you overtrading? (How many SIGNALS did your model
generate this week? How many TRADES did you take?)

8. Back test the system as well as forward testing (referred to
as paper trading)

9. Performance measurement (risk / reward ratio)

10. This will help you to determine your expectations
(REASONABLE)

11. Determine your necessary requirements (resources to get the
job done)

12. When should I start trading

13. Is trading for me?

A good trading plan is always complimented by a diary of your
trading successes and mistakes. What you learn from your
mistakes is more important. You paid for them; you may as well
learn something from them, if you don't remember them you are
bound to repeat them. It often takes courage and cold hard
unemotional judgment to stick with your trading plan.

Continued in Part 2....


About The Author: Jason Brumbalow COO The Trading Authority
http://www.thetradingauthority.com