The Stock Trading Plan - Why You Must Have One To Trade Successfully

This is the continuing narrative of our two fanciful traders, Simon Simon Peter and Paul.

Peter is a professional trader, Alice Alice Paul is not. Simon Simon Simon Simon Simon Simon Simon Peter have got a tested, proven, written trading program that he follows each clip he comes in a trade, Alice Alice Alice Alice Alice Alice Alice Paul makes not.

Peter and Paul have had vastly different Stock trading experiences - Peter have just made another significant net income - this clip from the Bear market, Paul have lost heavily.

A opportunity meeting with Peter's grouping of friends 1 twenty-four hours at luncheon launches Paul on a learning curved shape that volition see him go a good trader, but not without some hard lessons along the way.

Today Peter shares his trading program and the importance of having a trading program with Paul.

"Today we will work on your Trading Plan," Peter told Paul as they sat down for the start of their adjacent weekly mentoring meeting.

Peter handed Paul a transcript of Henry Martin Robert Miner's book, Moral Force Trading, and said, "Here, read this subdivision of this fantastic trading book." Alice Paul read to himself quietly as Simon Peter poured them both a cup of coffee.

"The intent of Technical Analysis is not to be able to accurately place every market position, all of the time. While this may be the reverie of many analysts and most recreational traders, it is an impossibility.

"Every method of technical analysis have it's limitations and at modern times will supply contradictory information. Unless the analyst, bargainer or investor is willing to accept that his or her analysis will from clip to clip not supply a confident sentiment of market position, he or she is doomed to failure.

"The aim of technical analysis is to place those market statuses and the specific trading strategies that have got a high chance of success.

"If there is a cardinal conception associated with trading and investing, it must be probability. All consistently profitable bargainers and investors cognize that every trading and investment determination only have a chance of success, never a certainty.

"Losses are inevitable and are just as much a portion of successful trading as profits. If a bargainer have got a successful trading plan, he or she should have no more than emotional response to a loss than to a win. Each volition be inevitable.

"While it may be hard to keep a completely non-emotional relationship to trading and investing, an apprehension that trading is a Business of chances will travel a long manner towards developing a stable attitude towards the Business.

"All successful bargainers have got a defined, written trading plan. The trading program can take many forms. At the very least, it will supply the minimum guidelines that must be satisfied before a trade will be considered. It may be as complex as a long set of very restrictive regulations that must be satisfied before a trade can be considered.

"Each have it's strengths and weaknesses. Neither method, whether regulations or guidelines, warrants success, but the deficiency of either volition guarantee failure.

"Why have got a trading program and not follow it? Each guideline and regulation must be included with ground and purpose. All successful bargainers and investors consistently follow their trading program and they cognize that if they go against their trading program it will always be costly in the long run.

"A bargainer who makes not consistently stay by his or her trading program is doomed to failure."

Paul looked at Simon Peter after he finished reading, and understood the deductions of what Henry Martin Robert Miner had written. He had never had any kind of trading plan. He had just taken the advice of other people and bought, held and hoped for the best.

Peter said, "You need a trading program my friend if you are ever going to do money in this Business. Then you have got got got got to have the ability to follow it.

"The paragraphs you have just read are as important, and maybe more than so, than learning any method of analysis or trading strategies or methods.

"Even a trading program that included technical analysis and trading strategies that were 100% accurate, in other words, would indeed foretell the hereafter tendency of a Stock or Index every clip with perfect certainty, would not ensue in you making a net income if you make not cognize and enactment in conformity with the qualities discussed above."

"With this in mind, I will now share with you my trading philosophy, trading program and rules.

"I have establish having this set of guidelines gives me a high chance of making successful, profitable trades. As Henry Martin Robert Miner said in his book, some losings are inevitable no matter what regulations or strategies are used. They are a cost of doing business.

"A Trading Plan and regulations that you have got tested and trust will assist you take the two biggest enemies bargainers confront - Fear and Greed. These two factors have got got probably cost more than bargainers more money than anything the market can throw at us.

"By authorship down and consistently following a solid program that you have back tested and proved to be profitable with you paper trading, you set yourself ahead of 90% of market participants who neglect to make any research or testing before they put on the line their capital in the market, and are eventually wiped out or give up because "the market just isn't for me."

"You must retrieve however," Simon Peter continued, "These are my guidelines. You might experience comfy with them or you may not -you have got to develop your ain style.

"These regulations also make not represent trading advice...you must sit down down and determine what your regulations and guidelines are going to be. Use these...or not. You must however make up one's mind which of the parametric quantities you are going to utilize for your trading, then -

Write them down into a program of action - and follow the plan.

Peter's Trading Doctrine -

He went on, "My trading aim is to come in trades in the direction of the major tendency using day-to-day end of twenty-four hours data. There are three statuses under which I will come in a trade -

When pattern, terms and my mechanical filters bespeak a tendency reversal have taken place.

On the first rectification within the new trend, for example, the first higher low in a new uptrend.

On any tendency continuance signaling once the Stock or Index have signaled the new tendency is underway.

"The initial tendency reversal place will always be in tons of 2 Futures places or $20,000 invested in a Stock. A tendency continuance trade entry will be 2 or more than hereafters places and $10,000 invested in a Stock.

Stop loss orders will be placed 5-50 cents or points past the utmost of the most recent swing swivel at the clip the trade is placed - the number of points or cents used depends of the Stock or Future being traded.

"These numbers will be different for every bargainer depending on hazard tolerance and account size. Only take on as much as you can manage psychologically, or you put yourself up for failure.

"If your place size is too large, you will be given to leap out at the first mark of trouble, often at the worst possible time. Trade within you comfortableness zone and success is much easier.

"My initial capital exposure never transcends 5% of my available account equity. Additional places will not be taken unless the initial place is in net income and taking the further place maintains the hazard of the full place below 5% of account equity. In other words, further places are only taken using the markets money.

Trading Rules and Trading Plan -

Peter continued as Alice Paul took notes, "My Trading Plan and regulations offer two types of trades - Tendency Reversal entries and Tendency Continuance entries.

"Trend Reversal entries are taken any clip a Stock or Index finishes a reaction and looks to be going into an Urge Trend.

They are also taken when a clear 5 Wave sequence have completed, as we can anticipate at least a significant correction, and possibly a change in tendency at the end of a 5 Wave sequence.

The regulations for Tendency Reversal trades are -

The terms must interrupt a valid trendline.

The Moving Averages must cross, indicating a change in the short term trend.

For Long Trades, the Stock or Index MUST do a higher swing high, followed by a higher swing low on the day-to-day chart. We come in the trade once the terms mass meetings from the higher low.

For Short Trades, the Stock MUST do a lower swing low followed by a lower swing high on the day-to-day chart. We come in the trade once the terms falls from the lower high.

"Trend Continuance entries are taken within the Urge legs of Trends. They are not taken when terms is within a consolidation time period or a reaction.

The regulations for Tendency Continuance trades are -

For Long Trades, the Stock terms must be above a valid Trendline.

The terms parallel parallel bars must be above the longer term (usually 18 days) Moving Average on the day-to-day chart.

The Stock must be making higher swing highs and lows on the day-to-day chart.

The reactions within the uptrend must be less than 4 days.

For Short Trades, the Stock terms must be below a valid Trendline.

The terms bars must be below the longer term (usually 18 days) Moving Average on the day-to-day chart.

The Stock must be making lower swing lows and highs on the day-to-day chart.

The reactions within the downtrend must be less than 4 days.

"Moving average time periods are Stock or Index specific, in other words, seek to happen a combination that plant on the markets you are interested in trading that don't give too many whipsaws. For example, 9 and 18 time periods work well on many Stocks. Sometimes you can travel as low as 6 and 13, or you may need as much as 15 and 30.

"Play with it and happen the optimal Moving Average numbers for the Pillory you trade. Then you can add the Trendline and swing high and low regulations and you are ready to look for some trades.

"A Valid Trendline must touch at least 2 and preferably 3 information point extremes - three important highs or lows within a trend.

So, in summary, this is Peters Trading Plan...

To come in a trade on a Tendency Reversal, he needs a Trendline break, a Moving Average crossover, and a swing higher or lower to get put in an uptrend, and a trendline break, a Moving Average crossover and a lower swing low and lower swing high to come in a downtrend.

To come in a Tendency Continuance Trade, he needs a strongly trending market with reactions to the chief tendency of less than 4 days. He comes in with the chief tendency as the reactions come up to an end and topographic points his halt loss orders just past the swing swivel utmost in lawsuit the tendency neglects to continue.

"Now we have got looked at my regulations for entering trades, allows set them to work on a Stock," he said to Paul.

Turning to his computing machine screen, Simon Peter opened a chart of IGT and scrolled back to 2001 - about one-half manner through the bear market. Charts available at StockTradingReview.com

"We cognize that at this point in time, the weekly and monthly tendency in this Stock was down, so we are looking for a valid entry with the tendency at the end of a larger grade reaction - a tendency continuance trade.

"I have got removed all but two moving averages for lucidity - these are 7 and 13 periods.

"You can see that the Stock made a low on August 8th, then rallied for 14 trading years including the interior twenty-four hours after the twenty-four hours of the high.

"It then drop sharply, breaking a swing low. Two interior years then one twenty-four hours up followed, then another interior day, followed by a twenty-four hours that bust the low of the inside twenty-four hours but closed slightly higher.

"The moving averages were coming very fold together, therefore the 3rd filter I utilize to come in was nearly in place, as we had already had the trendline interruption and lower top.

"The Stock broke down the adjacent day, and at the close, the moving averages had crossed - I sold $20,000 worth of IGT short at the stopping point and it drop sharply for 5 years before recovering.

"It had a two twenty-four hours rally, then a twenty-four hours down, so I moved my halt loss order to above the swing high this twenty-four hours down defined and was taken out of the trade three years later after terms rallied.

"My entry was at $13.18, my issue was at $10.70, giving me a nett net income after Brokerage of $4,605 for a 13 twenty-four hours trade.

Paul could see the set-up quite easily now once it was shown to him in an example.

Peter continued, "Lets have got a expression at another example." Simon Peter opened a chart of MER and scrolled back to one of his trades from May 2002. Charts available at StockTradingReview.com

"This trade was also when the bear market was well afoot and MER was in a strong downtrend on the weekly and monthly chart.

Looking at the day-to-day chart, Simon Peter said, "This Stock made a low, then rallied for 10 days. It then made a lower swing low and then rallied 2 years - the lower swing low is Filter one.

"It touched my short term trendline 4 modern times as it rallied before breakage down - that is Filter two.

"It then drop two days, had a 1 twenty-four hours rally, then gave a sell signaling as it took out the low of that day.

"This trade didn't ensue in the same quick net income as the 1 in IGT, but it was very appreciated all the same. My entry was at $40.55 and my issue was at $33.20 as it broke upwards through my halt loss order above a swing high.

"This Stock gave me respective more than good net income as the downtrend continued. The set-up is always the same.

"A short term Trendline break, a Moving average crossover, a lower low and lower top in a downtrend.

"Let's have got a expression at an uptrend so you get the thought of what it looks like in a rally." Simon Peter opened a chart of MSFT from Mid 2003, when the weekly and monthly tendency had turned upwards. Charts available at StockTradingReview.com

"You can see here that MSFT made a high in early July and then sold off for nearly over 5 weeks.

"Then the moving averages crossed and the short term downtrend line was broken convincingly by a large mass meeting off multiple lows at around $25.50. This set up a 5 twenty-four hours rally, then the Stock drop one twenty-four hours before recovering at the stopping point to be up on the day.

"The bargain signaling was generated at the close, as this met all of the conditions. The Stock rallied over 20% during the adjacent 5 hebdomads - that was very pleasant to watch."

Paul could see the simplicity of Peter's trading methods and was acute to travel out and apply them in the Stock market.

Peter cautioned him however, "Remember Paul, not all trades are this easy and bend out as well, but by trading these types of tendencies on the day-to-day chart, when the weekly tendency is also in the same direction, we have got a high chance of a profitable result in a large percentage of cases.

"Trying to think tops and undersides is a dangerous practice. It is a high hazard trading strategy that rarely bring forths consistent profits.

"It can be done using time, terms and pattern to assist us, as I did at the low in the S&P Five Hundred the other day, but the easy trades are when we take a piece out of the center of each with-the-trend range, and go forth the tops and undersides for others until our apprehension improves.

"Before you merchandise the market with existent money, I desire you to paper trade for 3 months, or until you are profitable 70% of the time.

"Once you are profitable with your paper trading, only then are you to put on the line your money in the market - is that understood?"

Yes Alice Paul replied.

Peter continued, "Stay well within your comfortableness zone, continue your capital and construct your account over time. Your success should then be assured.

"The regulations are there for you to learn and apply, but your top enemies are your ain fearfulness and greed.

"These two will rob your account if you don't derive control over them. You must take every trade your system gives you, follow your regulations exactly, and cleave to your trading program like a shipwrecked crewman makes to a life raft.

"Imagine that your life depends on you following your trading program perfectly...because it does.

"At least the life you wish for yourself and your loved 1s does."

Paul agreed to analyze hard and to seek to defeat his emotions of fearfulness and greed. He knew it wouldn't be easy, but he was going to make whatever it took to win as a trader.

With that, the lesson was over for that week.

Paul left Peter's office feeling like he had just been handed the keys to the Bank burial vault and knew his trading would never be the same again.

When he arrived home, he went consecutive to Incrediblecharts.com and studied his watchlist. He picked out some Pillory that looked promising and started to paper trade them.

He couldn't wait for his adjacent meeting with Simon Simon Peter - he was again filled with hope and gratitude for the clip Peter was disbursement with him, and he vowed that once he was a profitable trader, he would assist others win in the market.

His new trading life was about to begin...

To Your Trading Success,