Effective May 1, 2009

I. Introduction

A trading plan is an essential component of any successful trading endeavor.  The trading plan must encompass two broad aspects: the trading system and money management.  While the trading system — the markets one trades, the entries, and the exits — is important, the true root of a trader’s success lies in money management.  Money management governs the profit potential and defines acceptable risk.  While the trading system attempts to increase the probability of success, money management tries to reduce the likelihood of failure.

A trading plan must be unique to the individual trader.  There is no one-size-fits-all plan.  Account size, personality, knowledge and psychology all influence the characteristics of the trading plan.  Smaller accounts must seek markets in which the trader can trade.  Having minimal capital eliminates some markets all together.  A smaller account is better served investing in equities and may be best to focus on ETFs.  However, account size does not justify ignoring the money management portion of the trading plan.  On the contrary, the smaller account holder must focus more on proper money management in order to preserve precious capital.   Larger account holders have more asset classes available to trade and larger accounts can remain in the game longer.

This trading plan will define the markets, the trading system (indicators, entries and exits), and the money management techniques to manage account risk and position risks.  First-and-foremost, short, medium and long term goals will be clearly articulated.  The plan will define exactly what the desired end-state is.  What is expected to be achieved from trading?

Next, the Trading System will detail the day-to-day, monthly, quarterly and annual account management requirements, the position selection criteria, and the tools used to find and track candidates and positions.   What will be the criteria to make the watchlist, to enter a position and to exit the position?

Part IV of the plan, Money Management, will set strict risk guidelines.  It will establish the amount of acceptable risk for each individual trade as well as total risk levels at the account level.  How much can be risked at any one-given time and on any one-given position?

Finally, the trading plan will identify psychological risk mitigation techniques, including trading freeze triggers and trading system reevaluation criteria.  How will the trading plan be used to reduce human weaknesses?

II.  Goals

Overall, I seek to provide an annual return greater than the S&P 500.  The target annual rate of return is 20%.  Additionally, I will strive to make high probability trades, minimize downside exposure and employ sound risk management techniques.  I will attempt to attain a 40% win percentage and a 2-to-1 reward to risk ratio.  That is, gains to exceed losses by a 2:1 ratio.

In the short term, my goal is simple: protect precious capital!  I do not expect to be immediately successful.  Trading is a difficult endeavor that requires time and effort.  The only way to stay in the game is to preserve capital.  In the first 12 months my goal is to minimize my losses by adhering to my money management plan while seeking to improve my trading system.

Over the intermediate term, I will refine my trading system and money management techniques.  I will identify problems in the strategy that is reducing the effectiveness of the plan and implement new strategies to improve my training.  I will continue to learn about the markets and trading.  I will transition from my short-term, stay-in-the-game goal, to my long-term, beat the market objective to seek financial freedom.

My long term goal is to develop my skills as a trader and adjust my plan as necessary in order to consistently beat the annual return of the S&P 500.  My objective is to build enough capital and experience to attain financial freedom.  At this time, I do not seek to trade for a living, but to provide an additional source of income and provide for retirement.

III.  Trading System

The trading system will be simple. 

Markets:  I will concentrate on the equities market.  I will use both stocks and ETFs as my source for trading opportunities.  I will not use options, during the short-term period (first 12 months).  However, as I gain experience and broaden my educational background, I will seek to introduce options and options strategies as an investment vehicle.

Indicators:  Initially, I will utilize only one or two indicators, trendlines and moving averages.  As I continue to learn the art of trading I will introduce new indicators and/or replace indicators that are no longer working.  I will use a Triple Screen approach as outlined in Alexander Elder’s Trading for a Living and apply the indicators as prescribed.

Methodology:  General Markets. I will review the trend of the general markets on a daily, weekly and monthly basis.  I will focus on the three primary indexes: The Dow Jones Industrial Average, the Nasdaq 100, the S&P.  As I gain experience in trading and chart reading, I will add a broader index, such as the Russell 2000, as well as sector indexes by utilizing ETFs.  These ETFs, as well as their inverses, will likely be part of my vehicle pool. 

I will attempt to identify the long-term trend using weekly charts and the intermediate trend using daily charts.  The indicators used for the general markets will be a 50 period Moving Average and 20 period Moving Average.  I will maintain the charts and publish them as necessary when the trends shift.  I will seek to identify bullish (strong and weak) markes, bearish (again, strongly and weakly trending) and range-bound markets.

Stocks.  First, every month I will build a watchlist of 50 stocks for potential trading opportunites.  This watchlist is based on the screening criteria described in Dr. Carr’s Trend Trading for a Living.   The stocks will be priced above $5.  The average daily volume over the last 10 days will be greater than 500,000 shares.  Finally, the stocks will have a Beta (volatility) over the last 36 or 60 (depending on tool used) months greater than 2.  The resulting list of stocks will be ranked by Beta in descending order.

Primary Method

I will utilize the Triple Screen approach from Dr. Elder’s Trading for a Living.  The Triple Screen method requires traders to look at the position from three time-periods.  Since I will be holding positions for days to weeks, my main period, the intermediate period, will be based on daily charts.  The long-term period is a magnitude of 5 greater than the intermediate period – weekly charts.  The short-term charts will use a 60-minute time period.

Under the concept, the weekly charts will use a MACD Histogram as the indicator while the intermediate time-frame will use an oscillator, generally Stochastics but also the Elder Force Index.

The long-term screen will identify the weekly trend using a trend-following indicator and trade only in the direction of the trend (Elder, 248).

The intermediate-term screen will use an oscillator to identify short-term declines during long-term up trends for buying opportunists and short-term rallies during long-term downtrends for shorting opportunities (Elder, 248).

The short-term analysis will identify the entry.  The screen will trigger a long position when the weekly trend is up and the daily oscillator declines.  A short position will be identified when the weekly trend is down and the daily oscillator rises.

Entries.  I will use a buy-stop to enter a long position and a sell-stop when shorting.  When going long, a buy-stop will be placed $.02 above the previous day’s high and adjusted daily if the price continues to decline.  When shorting, a sell-stop will be placed $.02 below the previous day’s low and adjusted daily if the price continues to rise.

Source:  Elder, Alexander.  The Complete Trading for a Living.  Page 250.

Exits.  For long positions, a stop loss will be placed $.02 below the low of the trade-day or previous day, whichever is lower.  For short positions, a stop loss will be placed $.02 above the high of the trade-day or previous day whichever is higher.  Once a trade moves in my favor, the stop loss will be raised to the break-even level.  I will exit a trade when the weekly trend reverses or when stopped out.

NOTE:  Entries and Exits will need to be constantly reviewed for quality.  That is, making sure that the setups are successful and the exits are not getting me out before the trade has a chance to develop.  Some alternatives to consider for exits strategies is waiting 3 days before exiting or adjusting the initial stop below a technical level such as weekly support.

Alternative Strategies

I will also look to use the entry and exit signals outlined in Trend Trading for a Living.  These strategies will be added during the first 6-12 months and explained in detail before they are employed.

IV.  Money Management / Risk Management

Account Risk:  I will not risk more than 50% of my account at any given time.

Position Risk:  I will not put more than 2% of my account at risk on any one trade.  This does not mean, only investing 2% of my account on a trade.  Rather, the most I can risk on a trade is 2% of the value of my account.  For example if my account value is $10,000 I can risk $200.  If my entry is $10 and my stop loss  is $9 I can purchase 200 shares.

Open Positions:  I will have no more than 5 open positions at any given time.

Risk/Reward Ratio:  Will only make trades that have a 1:3 or higher Risk-to-Reward Ratio.

Halting Trading:  If I lose 35% of my account value, I will close out all my positions and halt trading until I can review my system, money management and trading plan in order to identify and fix the problem.

V.  Plan Administration

Market Analysis:  I will perform a detailed market analysis the first weekend of the month.  I will also perform a quick weekly and daily analysis of the market to identify any significant changes.

Screening:  I will screen for new candidates the first weekend of every month.

Trading Diary:  I will maintain a detailed trading diary.  This trading diary will include the current market trend analysis, the list of current and past candidates and a trading log.

Trading Log:  The trading log will contain the following information:

• Product Traded
• Position Size
• Target Entry Price
• Entry Price, Date and Time
• Stop Price
• Target Exit Price
• Reason for Entry
• Exit price, date and time
• Reason for exit
• Net dollar profit or loss (net of commissions and slippage)
• Market Conditions (at before, during and after trade)
• Notes

 VI.   Resources

The following resources will be used to perform my analysis, identify and track candidates, track technical, fundamental and psychological indicators, continue my education and generally maintain market awareness.

Screening:  Yahoo.com, AAII Stock Investor Pro, Stockcharts.com, Stockfetcher.com, Clearstation.com, Investors.com

Charting:  Worden’s Stock Finder, FreeStockCharts.com, NinjaTrader

Backtesting:  Stockfetcher.com, Ninja Trader, Stock Finder

News:  CNBC.com, Investors.com, WSJ.com

Education:  Elder.com, Investopedia.com, Amazon.com (Book list), SFO Magazine, Investors.com