Use this trading plan example as your blueprint to success!

Here is a trading plan example to give you a better idea of how to create your own plan. When you create this document it will serve as your business plan for trading. It is very important that you write this plan out, so you can reference it from time to time. I will go through each step that is discussed in the Trading Plan section of this website.

 

Success Ahead

You will find as you start to paper trade your plan some things will work and others will not. So you will have to continue to adjust the plan. I recommend paper trading to back testing because it gives you the ability to look for and take trades. Back testing can be helpful to test certain parts of the system but paper trading really gives you a better feel for how you and the system work together.

This trading plan example details a short to intermediate reversal system.

My objectives detailed in this trading plan example are:

  • Average 40%+ a year trading stocks
  • Replace my income, so I can spend more quality time with my family. By replacing my income it would allow me to not work and still have the money to buy our dream house and enjoy our kids while they are still young.
  • Take more time to go hunting, fishing and take martial arts classes. This would also allow me to have the time to do the hobbies I have always wanted to try.
  • Spend about 10 to 15 hours a week trading. Develop a system that only takes about this much time to run and still be able to make the type of returns that I want to achieve.
  • I would like to have achieved my objectives in two years. I am going to achieve this by putting all of my earnings back into my trading account. Once I reach my goal of $1MM in the trading account then I will start taking out 20% of my earnings to live on.

This part of writing a trading plan is the motivational part. You will find that if you have objectives other than making money you will be more likely to achieve your objectives. Making money is great and everybody wants to achieve this but it is the things that you can do with money that keeps you going.

The objectives in this trading plan example are objectives that keep me focused and motivated. You will need to come up with objectives that will keep you focused and motivated.

Trading Setup

I am going to trade large and small stocks that are either domestic or international, so I will need to follow the Vanguard Total Stock Market ETF symbol (VTI),SPDR S&P 500 ETF symbol (SPY), iShares S&P Small Cap 600 Index Fund symbol (IJR), EAFE ETF symbol (EFA), and the Emerging Market ETF symbol (EEM). These ETFs will be my market barometer to let me know where in the market I need to focus. Then I will use the corresponding sector ETF for the sector I am looking to trade. There are so many that I will list them at the end of my trading plan.

I will use the 20 day SMA and 40 day SMA on these ETFs. If the 20 day SMA is above the 40 day SMA, I’ll look for long positions. If the 40 day SMA is above the 20 day SMA, I’ll look for short positions.

More information on the trading setup in this trading plan example can be found in the Trading Plan section of this website.

Trading Screen

For long positions:

I will look for the sectors within each of the markets to find the highest relative strength using a 30 day and 120 day RSI calculation sheet that I will update weekly. Also, I will use Investor’s Business Daily (IBD) to give me there strongest sectors.

I will use IBD screens to look for stocks that have a relative strength rating of greater than 85 on their total score. These stocks can come from any research or reading and score and 85 to make it on my trading list. I will be looking mainly for those stocks that screen well in the strongest sectors.

For short positions:

This will be almost the opposite of the long position screen. I will look for sectors that have the lowest relative strength using both my proprietary screen and IBD. Then use IBD to run the analysis on the stocks in the weak sectors looking for a relative strength score of less than 45 total score.

Even if I get some potential short trades, I will ultimately be trading long if the broad markets are have the 20 day SMA above the 40 day SMA. The same goes for the long positions. Approximately 85% of the stocks movement can be attributed to the movement of the broader market.

This will give me my starting point to build my trading list. For this trading plan example, I will keep four watch lists.

The first list will be my largest list of stocks that could be potential trades. This list will be split for holdings that could be long positions and holdings that could be short positions. I will continue to add stocks that fit my screen and technical indicators to this list. If a stock gets bought out or if they merge I will take it off of my list. Also, I want to keep this list to 100 potential stocks. It is too hard to keep up with many more than 100 stocks.

The second list will be a list of stocks that are close to a buy or sell short point. These are stocks that have already made it through the screen and could be a potential trade at anytime. This list will also be split up for both long and short positions.

Third list will be my holdings. This will be a relatively short list, because it will only have the stocks that I currently own. Since there are a lot of trades throughout the year, I need this list to keep my current holdings in front of me. I will be tracking closing price of my holdings so I can update my stops.

The fourth list is my idea list. These are positions I may have read about or saw on CNBC and thought it might be interesting but did not have time to run my screen to see if it fits. So I will put it on the “Idea List” to make sure that at some point I get to run it through my screen to see if it fits.

More information on the trading screen in this trading plan example can be found in the Trading Plan section of this website.

Entry Signals

I am going to trade based on a pivot point signal along with support, resistance and volume for both long and short signals. A pivot point is when a stock has pulled back and stopped with the next day creating a higher high and higher low. Depending on the level of support at the point that the stock made the pivot I may require an additional day or two of consistent higher high and higher lows (for long signals) to make the trade. If the previous day’s low is at major support and there was not 25% higher average volume on the down day then I will execute the trade as soon as it trades higher than the previous day’s high (for long signals).

The same will go for short trades. The difference is instead of looking for higher highs, I will be looking for lower lows. All of the other criteria will stay the same.

More information on entry signals in this trading plan example can be found in the Trading Plan section of this website.

Exit Signals

The exit signal will be a trailing stop. I will figure this stop price based on the Average True Range (ATR) of the stock or the lowest (long trades) or highest (short trades) point of the pivot point. The stop price will be the greater of 1.5X the ATR or the highest or lowest point of the pivot minus $0.10 just in case it tests the low again. For example, the current price is $45.68 minus (1.5X ATR = 2.24) = $43.44 and the lowest point of the pivot is $42.98 minus $0.10 = $42.88. The stop will be $42.88. That is $2.80 difference between the current price and the stop. That is how much you will trail the price as it moves up. I will enter the stop order in the market every day.

More information on exit signals in this trading plan example can be found in the Trading Plan section of this website.

Position Sizing

In my position sizing algorithm I will risk 1% of my principal and 5% of market money. The 1% risk will take into account how many positions that I have on at any one time and reduce my principal by the amount I currently have risked. The market money is the profits that I have generated prior to putting on a new position. I will reset my principal to capture my gains on a quarterly basis.

More information on position sizing in this trading plan example can be found in the Trading Plan section of this website.

Writing a trading plan means defining every part of your trading plan, so that someone else other than you could understand how to trade it. In order to do this you will have to have a better understanding of all parts of your system. This trading plan example is written in the first person on purpose. This is your personal plan and should be written that way.

This trading plan example is for illustrative purposes only, if you want more information on how to put your own trading plan together go to the Trading plan section of this website. Every trading plan is personal by design. You need to make sure that you are designing your plan to meet your own objectives.

Ultimately you must design a plan that fits your trading psychology and objectives if you want to be able to consistently trade your system.

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