CHAPTER 4

Formulating a Workable Trading Plan

On the surface trading can seem very complicated and while the details are no doubt messy, at the highest levels trading is reasonably simple—something is bought and something is sold. That is about as basic as it gets.

The concept of a trading plan is not all that difficult either. It does not have to be overly complex, and in some ways the plan is part checklist and part plan. What is most important is to understand what each step means and how to effectively execute it. As outlined in the prelude to Part II, a trading plan must, at a minimum, necessarily address these six items:

1. Trend direction and strength for stock, sector, and general market
2. A clear understanding of time frames and which one or ones you are trading
3. Timing for entry and exit
4. Planned trading size and scale trading percentages
5. Probability of trade success
6. Reward versus risk for the trade

One could argue that other factors deserve consideration as well and that may be true, but at a minimum, the preceding six items are necessary to consistently trade successfully, so the remainder of this chapter addresses them as part of a trading plan decision template. It is important to note that the first four items in the list are the inputs to the final two. The probability of a trade being successful is highly dependent on each of the first four items just as the reward-to-risk ratio for the trade is critically dependent on items 2 through 4.

To illustrate ...

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