One of the most important things a new trader can do is to create and maintain a trading plan. Write it down. That's exactly what I'm doing here, only I've written it where everyone can see. Don't make the mistake of telling yourself that you'll keep it in your head. Depending on how often you trade, you're going to have a lot of things to keep track of mentally, and you're going to need that brain power. It only takes about an hour or two, but it can save you a lot of headaches, and most importantly, money!
Your plan (and you!) should be flexible enough to change your plan as market conditions, your skill level, and your account balance change. It shouldn't, however, change daily. Even though it's a good idea to review it daily (especially when starting out), you should only be making adjustments every few months or so.
Write it down, and stick to it. Your trading plan does nothing for you if you don't follow it.
Here are some of the things that should be included, but feel free to mention anything you feel is important.
- Why are you trading in the first place? Income, retirement, growth, speculation? This leads us to...
- What is your skill level? What are your strengths & weaknesses? This is going to affect literally every decision you make from here on out.
- What are your realistic goals?
- How much time can you commit, and when? This is important because it will help identify your time-frame. Someone who can only be in front of the trading screen for a short period of time or only after the market is closed is not going to be a day trader. Hence the next bullet.
- Are you a trader or an investor? An investor usually owns stocks for years at a time. They are not phased by the daily ups and downs of the market. If you are a trader, what is your time-frame? Minutes, days, weeks?
- What are you going to trade? It goes without saying that all beginners should stick to stocks, but this blog is focused mainly on options.
- What are the current market conditions? Bull/bear, volatile/stable, high/low interest?
- How are you going to select what you decide to trade? Are you more interested in stock charts and technicals, or the under-lying's fundamental data?
- What is your risk level, and how are you going to manage it? This topic CANNOT be emphasized enough.
- What are your trading tools and broker? How are you going to perform your TA/FA, keep track of your watchlists, screen your stocks, perform your backtesting, calculate gains & losses, etc?
- What is going to be your entry criteria? For TA, what indicators are you going to use? For FA, what metrics?
- What is going to be your exit criteria? This is even more important than your entry. This tells you when you are going to take profits, and limit your losses.
- How are you going to keep your records? Not only for tax purposes, but to learn from.
- I'm trading to grow my portfolio to the point where I will have enough capital to eventually use it to support all my financial needs. At this point, I will rely on it for income.
- I would consider myself an intermediate trader. I am not good at choosing individual stocks or breakout setups, but am good at determining price support & resistance areas.
- My goal is to grow my portfolio by 3% (conservatively) - 5% (aggressively) each month.
- I work full-time, and cannot trade more than an hour or two each day.
- I consider myself a trader in my growth portfolio, but an investor in my retirement accounts.
- I have chosen to trade equity options, especially spreads.
- The recent 4-month bull trend seems to have broken. Volatility was at a long-term low, but is now picking up. Interest rates are at long-term lows.
- I am primarily a TA, and have chosen a list of stocks based on market cap, average daily volume, current price, and a few simple fundamental metrics (P/E, ROA, ROE, ROI)
- I will not risk more than 10% of my account on any one trade.
- I use various charting software, and my current broker is OptionsHouse.
- I enter stocks that have pulled back to key support levels or moving averages and try to get 5-10% return on my capital at risk when selling credit spreads. I only open spreads where I have a greater than 80% probability of max profit.
- I do not use stops, instead I look for key support/resistance levels to hold. If/when those are broken is when I will exit the trade. Otherwise, I will exit when I have achieved 75-80% of my max profit.
- I use a spreadsheet to keep track of my trades, as well as P/L.
