Chapter 6 - Trading philosophy and capital management
Developing A Comprehensive Trading Plan
The contemporary marketplace is a fast-paced environment with seemingly endless possibilities. If you don't stick to a strategic framework while interacting within its borders, the possibility of a disaster for your money may become very real.
A robust trading plan addresses many of the essential elements for conducting operations in a regimented manner. The following questions must be answered precisely during the process of building a rule-based plan in the markets:
- Is the adopted methodology based on technical or fundamental analysis?
- Is the alternative time frame or today more desirable?
- Is the strategy automatic or discretionary?
Ideal Market (s):
- What products provide ideal levels of liquidity and volatility for the chosen strategy?
Money Management Plan:
- Given the available capital resources, what precautions are needed to protect the account balance?
- What kind of trade management standards are best suited for success?
Engaging in the markets with a detailed trading plan reduces the many risks involved when they are simply "shooting from the hip". Individuals can build a statistically verifiable track record and constantly trade according to a structured approach. Conversely, bad habits rooted in emotion, such as overtaking and managing reckless money, may be reduced or eliminated.
Creating and following an appropriate plan is the first step in eliminating many unnecessary risks associated with active trading. It must be easily understood and routinely followed- up for it to be effective. The comprehensive trading plan ensures that the trader has the best possible opportunity to achieve repeatable results.