Stuart McPhee’s Trading Plan Template Mindset

Stuart McPhee's Trading Plan Tem plate

M in d se t

* Right from t he st art you need t o ask yourself whet her you are prepared t o work t owards achieving a t rading plan t hat will work. I f yes, great ! Many people have com e before you and not succeeded at t rading. You need t o separat e yourself from all t hose people and let 's face it - this takes work!

* One of t he key quest ions t hroughout t he ent ire t rading plan t em plat e. Many people suggest that trading has a reasonably high failure rate so why do you think you are going to be any different from m ost people. Why are you going t o be successful t rading?

* How will you overcom e the em otions and feelings ( eg. fear, worry, excitem ent etc) and their influences on you when you are m aking your trading decisions?

* I n the interests of little distractions and clear thought, where are you going to m ake your trading decisions? Which location provides you the privacy to spend tim e with yourself and with your own thoughts in peace and quiet? I dentify a tim e in the day when you are best suited to have this tim e to yourself.

* Writ e down your own st rengths and weaknesses considering at least t he following areas: your self confidence, patience, discipline, organisational skills, com puter proficiency, m otivation, tolerance when things don't go your way, and your abilit y t o com m it . Who likes t o evaluate them selves? Not m e, I can assure you but it is a necessary evil.

* Rem em ber t he saying, " I f you aim at not hing, you are sure t o hit ! " I n line wit h t his, we wanted to identify our trading goals. Why are you trading and what do you expect to achieve in the next 6 m onths, 1 year, or 5 years ( or any tim e period you set)?

* How m uch t im e will you have t o t rade? This is crucial as it will m ost likely affect t he st yle of trading you adopt. Not m uch tim e available? Well, short term trading is highly unlikely to work for you.

* There is so m uch t o learn about t he power of t he m ind. I believe t hat you will only fully underst and t he different m indset issues when you act ually have m oney at risk and face cert ain situations yourself in the m arket.

Money

* You m ust set in st one t he m ost im port ant t hing wit h m oney m anagem ent ? prot ect ing your capit al. Even t hough your prim ary m ot ivat ion is t o m ake m oney and you consider t his im portant, protecting your trading capital is even m ore im portant. How can you m ake m oney, if you don't have any money to trade with?

* The m ost im port ant t rading rule is t o cut your losses. To do t his, we use st op losses. A `stop loss' is a pre- defined level ( price) at which you will exit a trade based on the prem ise that it is not m oving in the direction that you had anticipated, and therefore you are losing m oney. The first t hing was how are you going t o set your st op loss point ?

* One of t he best ways t o m anage your risk when t rading is t o lim it or set a cap on how m uch m oney you put int o a single posit ion. This is t o guard against t he possibilit y of som et hing adverse occurring. What is the m axim um percentage of your trading capital you are prepared to com m it to a single trade?

? St uart McPhee from st uart m 2015

* Another crucial part of m oney m anagem ent is posit ion sizing. How are you going t o posit ion size? Exam ples include t he equal port ion m et hod and t he m odel based on your risk am ount and where you posit ion your init ial st op loss. Which one are you going t o use? Second, what is going t o be your m axim um risk exposure across your t rading port folio at any one t im e? Will you lim it the num ber of trades based on how m uch risk capital you have at risk across all of your open trades?

* What happens if you keep losing m oney? This quest ion has lit t le t o do wit h t rading but rather your own financial situation. Are you prepared to lose every cent of your allocated t rading capit al before you are forced t o st op, or do you think you would like t o hold on t o som e of the m oney and com m it it som ewhere else, with the plan of either not trading again for an extended period of tim e or giving up altogether?

* Furt her on t rade size - if you have had 3 losses in a row, t he probabilit y t hat you are going to have a profitable trade doesn't autom atically shift in your favour. Nor does it continue to shift as each losing t rading passes. Don't increase your t rade size t hinking your next winner is j ust around the corner. After a few losses, your trade size should be decreased slightly to reflect your dim inished trading capital.

* Liquidit y is your abilit y t o t rade in a st ock wit hout adversely affect ing t he m arket price due t o insufficient buyers and sellers in t he m arket for t hat st ock. You never want t o be st uck wit h a stock that you need to exit from j ust because there are insufficient buyers in the m arket. How are you going to m easure liquidity and what will be your m inim um level you will accept?

* Volat ilit y is direct ly linked t o risk. Would you consider using a m inim um or m axim um filt er for volat ilit y percent age? I n t rying t o avoid speculat ive st ocks, will you only ent er t rades when the price is above a set am ount? I f so, what is that am ount?

* There are num erous product s available t o t rade including shares, fut ures cont ract s, opt ions on fut ures as well as opt ions on st ock, currencies ( foreign exchange) , CFDs and m ore, and they all have different risk profiles. I f you are trading m ultiple products, how are you going to allocate your capital accordingly based on the different levels of risk?

* What would you describe as an adverse m ove against you and what will you do should it happen t o you? Second, under what ot her circum st ances will you consider selling regardless of what exit points you set?

* Now to som e happier m oney m anagem ent areas ? selling with a profit. How are you going to trail the stock price with your exit once the price m oves higher? How are you going to calculate this?

* A strategy for to consider is pyram iding ? adding m ore m oney to a profitable trade. Will you consider pyram iding into profitable trades? I f so, at what point will you purchase m ore shares in the com pany and how will determ ine how m uch m ore to buy?

* Sim ilar to the m indset area, there is a lot to learn about m anaging your m oney in trading. Telling you t o cut losses is one t hing ? execut ing t hat rut hlessly and wit hout hesit at ion can be another. Working out that you are going t o use a 10% t railing exit for your t rades is all well and good ? st icking with that and not changing t he rules half way through a t rade can be anot her challenge alt oget her.

Method

* Concept ualise your t rading m et hodology. First , t alk in very general t erm s about how you are going to approach your trades. As exam ples, are you going to trade a leveraged instrum ent like CFDs and t rade short t erm reversals in m edium t erm t rends? Are you going t o t rade in only the top 200 stocks from your exchange and look at m edium term trends only with a view

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t o buying stocks as t hey t rade t o 12 m onth highs? Are you going t o trade m ore speculat ive stocks at the other end of the scale and trade breakouts from trading ranges?

* I f you are going t o use t echnical analysis, what it em s are of m ost int erest t o you? For exam ple, are you interested in trends? I f so, over what tim e fram e and how are you going to identify them ? Are you interested in reversals of short term or m edium term trends? I f so, how will you identify them and then what will you do once you identify them ? How about technical indicators? Will you use any of them ?

* I f you are going t o use fundam ent al analysis, what it em s are of m ost int erest t o you? For exam ple, are you interested in earnings, dividends, growth, acquisitions? I f so, how will you use that inform ation?

* So which product s will you t rade? Will you t rade m ult iple product s? Should you be t rading anything other t han st ocks if you be st art ing out ?

* One of t he t im e t est ed t rading rules on t he t rading- websit e is t it led `Follow t he Trend'. I t st at es:

" I n an environm ent where you will find no friends, the t rend m ay be the only thing that resem bles a friend for you. Always t rade wit h the t rend! Never at t em pt t o ident ify the bot t om in t he st ock and t im e your ent ry using t hat approach, as you are likely t o be run over as the st ock cont inues on it s way down. There are oft en great forces at work and m om ent um when a stock is trending in either direct ion, especially down so don't try to fight it. What type of trend are you interested in and how are you going to identify that trend?

* Are you going t o use any t echnical indicat ors? What t angible value does t hat indicat or( s) provide you and how are you going to interpret them ?

* Despite the passage of tim e, hum an nature and behaviour over the years, rem ains constant. All m arket part icipant s are driven by sim ilar em ot ions and will oft en react t o sit uat ions in the sam e way. Moreover, t here are always a cont inual flow of new part icipant s int o t he m arket and t hey are generally ignorant of t he way t he m arket has behaved in t he past . For t his reason, t he sam e m ist akes are oft en repeat ed by each new group of m arket part icipant s ? t his is why chart pat t erns oft en work. First , will you consider a part icular chart pat t ern as a set up ( lead int o) for a trade ent ry? Second, are t here any chart pat t erns that will im m ediat ely st op you entering a trade or at least have you waiting until the pattern has com pleted or dissolved?

* There is a process which seeks t o cat egorise t he indust ry/ econom ic sect ors in an equit ies m arket. I n m ost m arkets, the perform ance of all industry sectors is reflected in an index for each. Will you use any form of sector analysis in your m ethod? I f so, how will you use it? Will it be the st arting point for your trade selection process or will it be a final filter to ensure you don't enter stocks that belong to poorly perform ing sectors?

* A wat chlist is t he t erm t hat m any use t o describe a list of st ocks that have m et all or m ost of your selection criteria and are waiting for final approval for a trade entry ? it is a list of pot ent ial t rades. Oft en, wat chlist s cause m any people a great deal of frust rat ion because it takes so m uch effort to m onitor all the stocks and then it becom es overwhelm ing and all too hard. I t becom es inefficient and the prim ary purpose for using the watchlist in the first place is forgotten. Will you setup a list containing potential trading opportunities ( a watchlist) and how you will m anage it? How will you set it up? Will it be in a written diary, an excel spreadsheet or in what form at? How often will you analyse the contents of the watchlist to ensure it rem ains accurate? What additional com m ents will you m ake for each stock that will help you when you revisit t hat st ock for further analysis in the near future?

* Your decision t o ent er a t rade is one of t he first decisions you m ake when t rading. However, it is also one of t he least im port ant . There are far m ore im port ant issues, such as your posit ion size and what your exit plan is. What are your conditions that you look for in all of your trades? What setups m ay spark your interest and have you closely m onitoring the price of a

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st ock? Finally, what t riggers will you use? Here's a t ip ? don't st ress over t his. Follow t he t im e t est ed t rading rules and keep it sim ple. Sim ple works!

* Using a 'weight of evidence' approach can add t o t he effect iveness of your st ock select ion process. What this m eans is that you m ay place greater em phasis on certain conditions over ot hers. You m ay set up a decision m at rix and have a m inim um score t hat a pot ent ial t rade needs to reach before becom ing a genuine trading opportunity. Do you think you m ay consider using this approach? Does this provide you som e ideas for m odifying your current ap p r oach ?

* A trading diary should detail all of your trading decisions, including reasons for initiat ing a t rade, your em ot ions when opening t he t rade, not es concerning t he short and m edium t erm trends of the price and relevant econom ic sector, as well as daily adj ustm ents of exits. A t rading diary provides you wit h a m et hodical way of m aintaining a clear focus. I t can also assist you with learning from your m istakes. Will you use one? I f so, what inform ation will it con t ain ?

* I t is im perat ive t hat you m onit or your perform ance for a variet y of reasons. The m ost basic of t hese is t o ensure you oversee your t rading capit al. Why? The m ost im port ant aim in t rading is t o preserve your capit al. Furt her, m onit oring your perform ance allows you t o review your past t rades and learn from your m ist akes. This is a t act ic em ployed by som e of t he best t raders in t he world. They will periodically review all of t he t rades t hey have conduct ed, bot h winners and losers, and learn from them . How will you go about conducting a review of your trading activities and how often will you do this?

* Having a routine ( preferably written down) m akes it so m uch easier to follow your plan. Why is t his crit ical? Well, why do m ost t raders fail? They have no plan, or if t hey have one, t hey don't follow it . Sim ple. What the rout ine should do is com pile m ost of t he part s of your t rading plan so you ensure for every t rading opport unit y and subsequent trade, you process it m ethodically and efficiently. I t will also stop you getting distracted by other m atters. What will be in your routine? Write it down and m ake up m any copies of it so you can check it off every day and for every trade.

* When you place your order, what type of order will you use? How will you place your order? I f you use a hum an broker, then this question is of less im portance than those who use a trading platform or web browser and have no hum an intervention. Will you use the sam e type of order under all circum stances?

* The problem for som e people who have not yet chosen any soft ware, is t here is so m any available. The m ost basic feat ures are of course, t he abilit y t o chart ? t o t ake dat a for a st ock or ot her product and produce a chart which graphs/ plot s t he price over t im e. Most will provide som e technical indicators for you to place on the chart and will allow you to change the periodicity of the chart and perhaps zoom in and zoom out. What software are you going to use or at least, what features do you require?

* With regards to websites and m anaging the inform ation flow, it is im portant to identify what inform at ion you need and where you will source it . Wit h RSS feeds now available and people `blogging', this is becom ing easier and easier. What inform ation do you really need to trade and what inform ation is for interest only but doesn't im pact on your decisions?

* There are m any and varied st ockbrokers available t o individual t raders. Wit h t he rapid expansion of the I nternet over the last decade, t he st ockbroking indust ry has changed considerably. Which broker accounts do you already have and what additional accounts m ay you establish? What is each of the accounts for?

* The final st ep is t o docum ent your t hought s and answers int o a writ t en t rading plan. When you don't have a written plan, even though you have developed a plan, it is too easy to drift away and go back to old habits. Having the written plan provides you som ething tangible ? som ething you place your hand on, which will guide you to m aking the right decisions.

? St uart McPhee from st uart m 2015

Consider t he difference bet ween knowing what has t o be done and what you want t o do. I n trading, what has to be done is always the right choice, yet if you don't have a plan, you can easily decide with what you want to do, instead. Prepared by St uart McPhee Trader, Aut hor, Coach For st uart m

? St uart McPhee from st uart m 2015

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