Without a clear plan, no one can earn money on a consistent basis. A trading plan allows the trader to execute their trades consistently and without letting emotions get in the way. Clear entry points, stop-loss and profit targets are predefined in the trading plan, allowing the trader to focus on trade execution 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 lot and have included most of it in an extensive business plan.
A business plan should include the following:
- Various high probability trading and investing setups
- Graphics describing each setting visually
- How to set up your charts for each trade setup
- Where to place profit limits and stop orders
- How to manage risk in each trade setup
- Rationale for each trade setup
- 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: Some selected 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 stock and/or net short option trades on various large and mid-cap stocks and ETFs.
Today’s dynamic markets require flexibility in trading timeframes and adaptability of trading ‘systems’. A multi-time frame trading approach attempts to capture opportunities on those specific time horizons. The goal is to achieve more consistent profits.
The benefits of trading on multiple time frames are many and to some extent also depend on the trading/investment strategies used. Bust mostly benefits are as follows:
- Considerably decreases the correlation of your portfolio vs. The market
- Automatically ‘hedges’ your portfolio by having ‘long’ and ‘short’ trades assigned to different time frames
- Gain a significantly better perspective of the current market outlook and opportunities
- Find more trades with the most favorable risk/reward ratio
- Act from a more neutral point of view and without emotions.