Without a clear plan, no one can consistently make money. A trading plan allows the trader to execute his trades consistently and without letting emotions get in the way. Clear entry points, stop loss and take profit targets are pre-defined in the trading plan, allowing the trader to focus on executing the trade rather than having to interpret each trade as it unfolds.
For me, during my thirteen years in this business so far, I have learned a great deal and have packed most of it into one extensive business plan.
A business plan should include the following:
- Various high probability trade and investment setups
- Graphics that describe each configuration visually
- How to set up your charts for each trade setup
- Where to place take profit limits and stop orders
- How to manage risk in each trade setup
- Justification of each commercial configuration
- Asset Allocation Guidelines
- How he handles market psychology, money management, score keeping
A Trading Plan should also include the time frames you decide to trade.
This sounds more complicated than it is. You need to decide which time frames best suit your style for day trading, swing trading, or longer-term investing and/or how you want to combine those three time frames.
For example:
1) (Bucket 1) Time Horizon: 1 Day or Less: Select intraday setups on the E-Mini S&P500 Index Futures contract and individual stocks.
2) (Bucket 2) Time horizon – 2 days to 3 weeks: Trades in various large and mid-cap stocks and ETFs, also possible through the options market.
3) (Container 3) Time Horizon: 3 weeks to 6 months: 1) A container of long stocks and/or net short options transactions in various large- and mid-cap stocks and ETFs.
Today’s dynamic markets demand flexibility in trading terms and adaptability of trading ‘systems’. An approach to trading on multiple time frames attempts to capture opportunities on those specific time horizons. The objective is thus to achieve more consistent profits.
The benefits of trading multiple time frames are many and to some extent also depend on the trading/investment strategies used. Bust mostly benefits are as follows:
- The correlation of your portfolio vs. The market
- Automatically ‘hedges’ your portfolio by having ‘long’ and ‘short’ trades assigned to different time frames
- Gain significantly better insight into the current market outlook and opportunities
- Find more trades with the most favorable risk/reward ratio
- Act from a more neutral and emotionless point of view.