I enjoy receiving email messages from my readers worldwide, and I do try to answer each and every one of them. A frequent question I get from readers goes something like this: “Here is my own trading system (or trading plan) and what do you think of it?” The reader then explains in detail the trading system parameters or the trading plan. My answer to this question is usually this: “If your trading system or plan works for you, then stick with it and don’t make major changes to it. The old American saying, “There’s more than one way to skin a rabbit” certainly rings true in successful futures or stock trading methods.
Importantly, just because one trading method or plan works well for a particular trader, it does not mean the same plan will work well for another trader. Trading plans should be customized to fit the particular person.
There are certain basic trading tenets that all trading plans should address, such as proper money management. But again, what is proper money management for one trader may not be for another.
Below are a few general questions that may help you define or refine your own trading plan, or that may help reaffirm that your trading plan is the right on the mark for you.
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Are you a trend trader? Most successful traders are trend followers, in some form or another. But there are a few successful traders who do “buck the trend” and are not trend-followers. If you are a trend-following trader, then your trading plan should include employing some technical tools that focus on the trend of the market–such as moving averages or oscillators like the Relative Strength Index (RSI) or Slow Stochastics. If you do not consider yourself a trend-following trader, then you probably should not use trading tools whose main focus is price trend.
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What is your trading “timeframe?” If you are mostly a “day trader,” then your trading plan needs to include trading tools that attempt to define shorter-term trends or recognize shorter-term market turns. A day trader is likely to be less interested in a 40-day moving average than he or she is a 15-minute moving average. A longer-term “position trader” is likely to focus on longer-term trend lines or fundamental factors such as economic reports or weather patterns. There are successful day traders and successful position traders, but the point here is that some different trading tools should be employed for each type of trader.
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There is no right or wrong answer here. There are successful aggressive traders and successful conservative traders–but they very likely have significantly different trading plans or methods. The aggressive trader should realize that he or she will likely experience some bigger trading losses at some point, in an attempt to take bigger profits off the table. The aggressive trader’s trading plan should take into account that trading-account drawdowns are likely to be larger during any losing streak. While the conservative trader’s trading plan will likely not place as much emphasis on big drawdowns, neither should that more conservative trading plan expect to see bigger trading profits accrue in shorter periods of time.
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What is your benchmark for trading success? Are you an aggressive or conservative trader? This question does not have a single right answer, either. However, your trading plan needs to take into account what you deem to be successful trading. Are you satisfied to be a part-time trader who is not “in the market” with trades at all times. Or, are you determined to be a full-time trader who does have a position or positions on most of the time. There is no doubt that there is much more pressure on the person who tries to be a full-time trader. Any trading plan for the full-time trader needs to be that much more concise, including contingency plans for losing streaks and bigger trading-account drawdowns.
