Trading Plans and Development

Trading Plans and Development

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In order for any business venture to produce profits, or rather positive results it is necessary for it to have a business plan. Trading if understood as a long-term business is no different than any other traditional forms of entrepreneurship. Success is determined by pre-planning your activities and following through with that plan. This is the way you will get to regular and consistent results, since it will allow you to efficiently isolate the best trading practices for you as an individual trader.

Trading Plans

This is the most important part of your trading business and it isn’t easy to fulfill, but planning out your trades will benefit you a lot in the long-run, so it’s important to understand that you can and will in time get better at this.

Before we start learning about developing these plans for yourself it’s important to make a certain distinction. There are two broad trading types: Discretionary and System traders. The first type is all about decision making, a trader that doesn’t necessarily follow a fixed set of rules upon which he makes his trading decisions, but rather follows the markets and their trends and makes decisions manually and on the fly, in response to real-time information presented to him by the trading platform.

The latter type, or system trader is the trader that completely relies on a rule-set to make the decisions for him, so he’s capable of employing trade automation, to implement this rule-set we mentioned.
For most people, it is deemed easier to simply start trading discretionary, and this is where most traders start, making decisions based on a combination of information and even intuition, in hopes of entering valuable markets with a high probability of profit. Even if this type of trader uses rules to guide their decision making process, the decisions are made manually and the trader has the final say.

Conversely, systematic traders follow their trading system religiously. This type of trading is based on a fixed set of rules, and it’s perfect for automation. Their systems are coded into the trading platform’s language, so normally once you press the “ON”, all trade control is passed down to the software, which then proceeds with code execution. Unlike intuitive traders, they need a consistent and well-developed trading plan which eliminates the amount of guessing one needs to do and generates a consistent profit over longer periods of time.

How to develop a trading plan

This is the most important piece of documentation that you need to create in order to achieve a long-term success as either a discretionary or a systems trader. It will allow you to make informed decisions, eliminating part of the risk that comes with trading.

Which markets will be traded?

When it comes down to the cryptocurrency markets, they differ greatly from traditional market places, where different stocks, bond, futures and options are traded. Unlike these marketplaces, crypto-markets usually involve the trade of BTC against other well established crypto and fiat currencies. Due to the nature of the crypto-algorithm the currencies are treated (in most cases) like both stocks and commodities. Worth to mention is that you can also trade against new coins being created, once their ICO finishes.

Your job as a traded is to clearly define what markets you want to participate in and this decision is based on the premise of good market volatility and liquidity, so basically you want to be able to execute orders efficiently, regardless of size and without causing a devastating change in price by doing so.

Liquidity can be measured by these factors:

  • Speed, representing how fast can a larger trade order be fully executed
  • Persistence, representing the tendency (and time needed) of the market to gravitate back towards the nominal price, after a large trade order is executed.
  • Depth, representing the amount of orders beyond the best bids and asks
  • Width, representing how wide is the gap between bids and asks

Good liquidity markets have a tendency to present really tight spreads to the trader and sufficient depth to quickly execute orders. It is important to you as a trader, because it will make sure that your orders are completely filled, without dramatically affecting price, while at the same time, presenting minimal slippage for your budget.

The other aspect you need to consider regarding market choice is volatility, which in the crypto-markets is a relatively frequent type of market. It represents the price action on a specific market, meaning how fast and by which amounts the price goes up and down. You do need some volatility since every movement in price is an opportunity to gain profit, while if the price remains constant the opportunity for profit is constantly 0%.

You need to make sure that your trading plan is developed and tested for the specific market you plan on entering, rather than re-using an older plan. The reason for this is because all markets are different and they re/act in their own specific way. In order to eliminate unnecessary loss of profit, you need to create a plan for every market you plan on entering and have a concrete strategy as to how you will go about creating profit.

It is best to primarily focus on one market when you start off, and expand as you gain trading experience, knowledge and confidence. Doing so prematurely puts you in a difficult position to juggle in-between markets and expend unnecessary mental effort.

What is the chart interval upon which you will make your trade decisions?

Often associated with the trading styles which we laid out in the previous article. These chart intervals can be based on different factors like, time, activity or volume, and you are the one who gets to choose what type of chart interval will be presented. It goes down to personal preference and trading needs, so it’s natural that long-term traders are going to be interested in longer-term charts and vice-versa.

The price action is going to be the same, regardless of the chosen chart and the difference is simply in the overview of the markets. You can incorporate multiple chart types, but your main charting interval is going to be used to specify trade entry and exit.

Main chart indicators

Once you’ve chosen the particular chart interval, it’s time to decide upon which indicator you will make your decisions. Mathematical calculations that are based on the past and current price or volume activity of a particular market are promptly called technical indicators. While they don’t provide signals to enter or exit markets, they allow you to anticipate market behavior and derive signals from this interpretation. There are many different types of indicators available, interpreting trends, volatility, momentum and trade volume. These are readily available to you as a trader on most exchanges.

Rules for Position Sizing

This is the part of your trading plan where you clearly set the size of the positions that will be used in this specific market. Most exchanges have a minimum order value, so you should first examine this fact. This way you can balance the amount of positions you want against the minimum order value and clearly define the size of said positions.

Entry Rules

Depending on any particular trader’s character, these entry rules will be laid out in accordance to their particular nature. Some of us are aggressive, while others are conservative, thus the entry to market rules will differ for all of us. Conservatives will miss out on good trading opportunities, while aggressive types will enter markets prematurely and generate good trading opportunities for others. These rules can be used by both types and even traders which consider themselves balanced, and using them will provide you with the tools to consistently, confidently and decisively enter the markets without a flinch.

In order to create entry rules, traders use trade filters and trade triggers. The filters define the conditions that need to be met in order to enter the market, acting as a safety switch for the trading trigger. Once these conditions have been met, the trigger is activated. The trigger is basically a line on the chart that helps define trade entry. These triggers can be used upon the basis of different conditions, ranging from price threshold to indicator values. Here is an example presented on Investopedia
Trade filters:

  • Time is between 9:30 AM and 3:00 PM EST
  • A price bar on a 5-minute chart has closed above the 20-day simple moving average
  • The 20-day simple moving average is above the 50-day simple moving average

Once these conditions have been met, we can look for the trade trigger:

  • Enter a long position with a stop limit order set for one tick above the previous bar’s high

See how the order type that will be executed is specified within the trigger parameter. This is especially important since using a different order type will produce different results, so you need to completely understand what we outlined in the previous article.

Exit Rules

The old adage that you can enter a market at any price and create profit when exiting at the appropriate time is really simple, but nonetheless very true. Presenting a very important aspect of trading plans, market exits are the ultimate defining part that makes a trade profitable. Considering this, you should invest the same amount of time into researching and testing your exit rules, as you did with entry rules.

These rules define the possible outcomes of your trades, such as the time of exit for the trade (popular on traditional day markets, end of day), hitting profit targets, defining stop loss and trailing stop levels and executing stop and reverse strategies.

Just like entry rules, the specific order types that you are going to use should be clearly defined within your trading plan

  • Exit when hitting the profit target, set 10 tick above entry price, use limit order
  • Exit when hitting a target 5 ticks below entry price, use stop order

Powerzonetrading.com offers a great template that can be used to develop a trading plan that includes all necessary information, Entry and Exit Conditions, Time Frames, Position Sizing, System Type, Trading Instruments. You can use this one, or another template that you create, depending on personal preference.

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