Trading plan

Trading Plan

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Trading Plan
Last printed 7/7/2010 12:51:00 a7/p7

Trading Plan
Replace this text with the purpose of this trading plan.

Example: The purpose of this Trading Plan is to identify the action items necessary for
rational decision-making to trade the financial markets and to provide an edge over
other market participants.

Mission Statement
A Mission Statement is a big, long-term end-result or achievement. The mission is the
biggest and most important thing to be accomplished. It is a WHAT versus a HOW. It is
a vision of the future. There is only ONE mission.

Example: To be able to afford to purchase the things we desire without having to worry
about cost.

Type your Mission Statement here

Goals
Goals are general intentions toward the attainment of the mission and are not specific
enough to be measured. Goals are broad and usually can be written in one sentence and
answer the question, “Where do you want to be in…?” Usually you want to make short-
term goals that are achievable in the time period of the plan.

Example: Achieve success in trading the financial markets

Type your Goals here

Objectives
Objectives are HOW the goals will be achieved. They are precise actions that must be
measurable. It’s the actions you take to make your goals reality. They usually are
written as a “by” line. List each objective on a separate line.

Example:

1. By the 31st of each month, participate in at least 4 trading rooms

2. By December 31, 2010, increase trading account value by 30%

3. By December 31, 2010, attend 1 Investools Live Workshop

1. Type your Objectives here. Use a separate line for each Objective.

Trading Plan Page 2 of 18

Trading Team

Trader(s): Replace this text with the name of the person(s) who will
be trading under this plan

Investools Education Level: Replace this text with the education
level of the person(s) who will be trading under this plan, e.g. PHD

Investools Experience:

• Replace this text with your Investools experience

Types of experience you might want to include above: when Investools education
began, what courses have been completed, workshops, etc. You may also want to
include any TOS trainings here as well.

Non-Investools Experience:

• Replace this text with your Non-Investools experience

Types of experience you might want to include above: other education services you
might have received training from, such as Options Xpress, Sheridan Mentoring,
Investors Business Daily and others.

Trading Experience:

• Replace this text with your trading experience

Types of experience you might want to include above: how long you’ve been trading
real money or if you are only trading paper money, what percent your account has
gained or lost, lessons learned, what types of trades you’ve made, etc.

Skills:

• Replace this text with the skills you poccess that make you
suitable for trading.

Are you organized? Are you good at seeing chart patterns? Good at math? Etc.

Support Structure
Trading Partner
A trading partner is not only a person who you can run trade ideas by, but is also the
person who you can trust to get into your trading account and take care of any
trades you need to make or close in your absence. If you don’t have a trading


partner, delete this section. Also delete any fields that may not apply.

Replace this text with the name of your Trading Partner
E-mail
Phone Home
Phone Mobile
Fax Fax

Trading Groups
Local
1. Replace this text with each group you belong to that holds local
meetings. List each on a separate line.
Things you may want to include above: how often the group(s) meet and how often
you attend, and what or how do you contribute to the group(s)

Online
1. Replace this text with each online group that you belong to. List
each group on a separate line.
In addition to the things listed in the local groups, you might also want to include the
groups hold online meetings, how often, and how often you attend.

Tax Preparation
If you do not have a person or business that prepares your taxes, either delete this
section or state that you prepare your own taxes. Delete whatever fields do not
apply.

Replace this text with the name of the person or business that
prepares your taxes
Street Address
City, State, Zipcode
E-mail
Phone Phone
Fax Fax

Broker – Think or Swim (TOS)
If you do not use TOS as a broker, then you should delete the text provided below or
substitute the text with information from your broker. If you have a second broker,
you can add their information in another section that follows this one.


Account(s)
Replace this text with your account type(s) and account
number(s)

Trade Desk and Compliance
6:00 a.m. – 6:00 p.m. CST (Mon-Thurs)
6:00 a.m. – 5:00 p.m. CST (Fri)
tradedesk@thinkorswim.com
1-773-443-3220

Tech Support
Same hours as the trade desk
tech@thinkorswim.com
1-866-839-1100 ext. 3290

General Mailing Address
Thinkorswim, Inc.
600 W Chicago Ave., Suite 100
Chicago, IL 60610
1-773-435-3210 Phone
1-733-435-3232 Fax

TOS Contacts:
Founder – Tom Sosnoff, tom@thinkorswim.com

Founder – Scott Sheridan, scott@thinkorswim.com

Option Strategist – Don Kaufman, dkaufman@thinkorswim.com

Platform – Tom Preston, tpreston@thinkorswim.com

Tools and Actions

Tools


1. Replace this text with any paid or free subscriptions, services, etc.

Examples of things you might include:

1. Investools Web site, paid through 5/29/09

2. SFO magazine, free monthly

3. Shadow Trader Pro Newsletter, $20 monthly

Actions

Daily

• Replace this text with your daily actions.

Daily actions are things that you do every single day. They should be listed by time if
you are the type of person who needs to follow a detailed schedule, including break
times. Otherwise, you can create a general list. Examples of types of things to include:

• chat with other traders

• enter and exit positions in the last 30 minutes of the day

• search for new trades

Weekly

• Replace this text with your weekly actions.

Weekly actions might be tasks that are completed over the weekend by might also be
weekly meetings, etc. Some examples of types of things to include are:

• TOS Wednesday class

• Investing Foundation Friday Capstone

• Shadow Trader Sunday video

Monthly

• Replace this text with your monthly actions.

Monthly actions might be meetings you attend monthly or tasks that are only required
periodically. Some examples of types of things to include are:

• St Louis Metro East Meeting, 1st Saturday of the month.

• View and record past month performance, 1st Sunday of the month

Quarterly (April 1, July 1, Oct 1, Jan 1)


• Replace this text with your quarterly actions.

Some types of things you might want to include as quarterly actions are:

• Determine if the current strategies are effective and improve if necessary

• Determine progress in reaching objectives

Annually

• Replace this text with your annual actions.

These are action items that only need to be completed once a year. When the item is to
be done should be included. Types of things you might want to include are:

• Set an annual profit objective for the coming year – late November

• Tax preparation – early March

• Revise trading plan – late December or early January

Performance Management

Record Keeping

• Replace this text with an explanation of how trading records will be
kept

An example of record keeping would be: Dates, Trades, and P/L are recorded into an
Excel spreadsheet on a monthly basis

Evaluation

• Replace this text with an explanation of how success or failure will
be evaluated. If more than one form of evaluation will be used, list
each on a separate line.

Will you keep a blog or trading journal? What types of things will you keep track of? How
often will you update it? Will every trade be evaluated or will this be done periodically?
You might incorporate record keeping and evaluation by having a “notes” column in your
excel spreadsheet.

Money Management


Per Trade Risk

Replace this text with the maximum risk value for a single trade.% of
total account

Generally per trade risk is between .05% and 2.0% of total account size. Also
acceptable but less desirable would be a fixed number of contracts per trade or a fixed
sum at risk. If the per trade risk varies by strategy, you should state this.

Account at Risk

Replace this text with the percentage of your total account at risk in the
market at one time for all strategies combined.% of total account

If you determine you want to risk 10% of your account and have set a 2% max loss per
trade, then you would be able to have 5 trades open at a time (without moving stops).

You can more accurately determine the percentage of your account to risk by using
mathematical formulas. See appendix A “The Kelly Criterion” and appendix B “Opitmal
f”. Both are based on past performance (can be actual or back tested performance).

Reward-to-Risk Ratio

Replace this text with the risk-to-reward ratio that you require for trades.

If the profit potential must be at least three times the possible loss to be considered,
either state this or state 3:1. If it varies per trade, state that as well.

Trading Rules

1. Replace this text with your trading rules.

Trading rules may be Psychological, such as “never, ever live in hope or fear” or
Operational, such as “do not put more money at risk in one trade versus another”.
List each one on a separate line. These rules are not strategy specific and they
should not contradict any strategy. For instance, you cannot have a rule that says
you’ll only trade in the last 30 minutes of the day if you have a strategy that calls for
you to trade opening gaps.

Trading Strategies
Examples given for strategy #1 is based on JJ Kinahan’s Iron Condor strategy. This strategy
is provided for example purposes only and is not a recommendation to include this strategy
within your own trading plan.


Replace this text with the name of Strategy #1.
Example: Short Iron Condors

Strategy Allocation

Replace this text with the percentage of account at risk for this strategy.
% of total account.

You might have said you’d risk 10% of your total account. If you want to risk 5% of
your account for this strategy, then you would type 5.

If there is a different per trade risk for this strategy than was listed in the earlier
section, you would indicate that here.

Description

Replace this text with a description of strategy #1

Example: Market-neutral, defined-risk position that profits from positive time decay
(theta) and can be profitable over a wide range of stock or index prices at expiration.

Maximum Profit

Replace this text with an explanation of how the maximum profit for this
strategy is determined

Example: Iron condors are executed for credits. The credit received when you sell the
Iron Condor is the maximum profit potential. Max profit occurs if the underlying price
settles in between the short put strike and the short call strike at expiration.

Maximum Loss


Example: The dollar value of the difference between the strike of either the short call
vertical or the short put vertical, whichever is greater, minus the credit received when
selling the Iron Condor. Max loss occurs if the underlying price is below the strike price
of the long put or above the strike price of the long call at expiration.

Candidates

1. Replace this text with an explanation of how you will find trade
candidates and what rules will be followed

Example:

1. Look for indices and index tracking stocks (ETFs) such as the DJX, DIA, IWM,
MNX, and SPY that have medium volatility and are expected to trade within a


range, without a strong tendency to trend.

2. Underlying must have massive liquidity, tight bid/offer spreads, and high open
interest.

a. Open interest should be 20 times the number of Iron Condors sold.

If you are going to use only certain ETFs or Indices, you should list those. If you are
going to do a search to find candidates, you should list your search criteria and list how
often you will conduct this search. Also: it’s really not specific enough to use words such
as “massive”, “tight”, or “high”. If massive means 700,000, then say 700,000. If it
means 1,000,000, then say 1,000,000.

Entry Rules

1. Replace this text with the entry rules for Strategy 1

If you use certain indicators for set ups, you should indicate that here. Include the
settings for the indicators and how you use them.

Example:

1. Sell the iron condor when the option expiration is at least 4 weeks away and not
greater than 10 weeks away

2. Sell the iron condor with a 50% to 70% probability of success

Ideally you want your criteria to be specific enough that someone else could trade your
strategy. You also want your rules to be very black and white.

Exit Rules

Profitable

1. Replace this text with the profitable exit rules for Strategy 1

Example

1. Close the iron condor 4-10 days prior to expiration

2. Close either side of the iron condor early if it can be bought back for 10% or less
of the strike width of the underlying. For instance, SPY has $1 wide strikes. SPX
has $10 wide strikes.

3. If the long option is trading for .05, do not close it out. Only sell the long option if
it covers the cost of commissions.

You would also list if you use profitable stops or alerts. Do you place a stop when you
place the trade? Etc.

Unprofitable


1. Replace this text with the unprofitable exit rules for Strategy 1

JJ’s unprofitable exit rules are not provided. An example of an unprofitable rule might be
to exit if the price moves 3 days beyond the short strike (if you’ve tested this and found
it to be effective in reducing loss.) You may also want to close a position if it reaches a
certain loss. It may also be proven through back testing that with this strategy is it
better to let it go.

If you use indicators for exit, you would include them here. You would need to include
information on how the indicators were set up and how you read them.

You would also list if you use unprofitable stops are alerts. Do you place the stop when
you place the trade? Etc.

Back Tested Results

Replace this text with your back tested results for strategy #1

No back tested results have been included.

The kinds of things to include in your back test results would be: number of trades
(should be at least 100 to be statically relevant), median % win, median $ win, median
% loss, median $ loss, percent winners, percent losers, return on risk (ror) and/or
return on investment (roi), and expectancy. You may also want to include increase in
account value.

Examples given for strategy #2 are based on information contained in the Investools
Investing Foundation Course book. This strategy is provided for example purposes only and
is not a recommendation to include this strategy within your own trading plan.

Example: The Investools Method

Strategy Allocation

Replace this text with the percentage of your account at risk for this
strategy.% of total account.

Note: Strategies such as this one will require more use of capital. Though you may only
risk 5% of your account for this strategy, you may actually need to use much more of
your account to purchase the stock for this strategy.

Description


Example: Bullish, controlled-risk position that profits from turning points of the price
movement created by a stock and can be profitable as a stock rises in price.

Maximum Profit



Example: Profit is unlimited.

Maximum Loss


Example: A sell-stop is used that will limit the amount of the loss. However, sell-stop
orders are not guaranteed to close the position at the price desired. Gaps between
closes, low volume, and quick changes in volatility can impact where, and if, the order is
executed.

Candidates


Example:

1. Maintain positions in 12 to 20 stocks where possible

2. Have at least half as many industry groups represented positions as there are
stocks

3. Look out for similar groups

4. Watch industry group rotation within the Big Chart

5. Select stocks from companies of varying size and financial performance

6. Some of the positions should be exchange traded funds (ETFs) that track indices
or sectors

7. By small numbers of shares so they can be held for the intermediate to long term
when necessary

8. Use “Green Red Arrows Search” from within the Investor Toolbox

a. Phase 1 score of 5 or above

b. F/E score of 3.25 or higher

c. Price Pattern score of 2.50 or higher

Entry Rules



Example:

All of the following criteria must be met to be considered a buy signal:

1. Solid Fundamental Score (F/E 3.25 or >)

2. Up trending Price Pattern (2.50 or >)

3. Strong Industry Group – stable to rising over 2 months (unless the industry
group contains less than 10 stocks)

4. Strong Institutional Support – volume surge of at least 50% > than average
volume OR AccDist score of 60 or >

5. Chart:

a. 30 day Moving Average with Breakout Signals, showing green arrow

i. The stock price must not move more than 5% after the green
arrow appears or it is too late to take the trade

b. MACD indicator with Breakout Signals, settings 8,17,9, showing green
arrow

c. Stochastic indicator with Breakout Signals, settings 14,5,0, with
overbought setting of 75 and oversold region of 25, showing green arrow
or phantom green arrow (indicator moves to just above 25 before turning
around and moving higher)

d. Market Sentiment indicator, rising (bullish confirmation)

Exit Rules

Profitable


Example:

1. Red arrows appear on each of the chart’s indicators (or 2 red and 1 phantom red)

a. If there is profit in the trade, move the sell-stop order up to a price that is
3 percent below the lowest price the stock has traded when the three red
arrows were appearing that corresponds to a support level

Unprofitable


Example:

1. Red arrows appear on each of the chart’s indicators (or 2 red and 1 phantom red)


a. Manually the position and cancel sell-stop order

2. Sell-stop order is triggered

a. The sell-stop automatically closes the trade

Back Tested Results

Replace this text with your back tested results for strategy #2

Back tested results are not included.

Examples given for Strategy #3 are based on an article in the November issue of SFO
magazine. “Technical Strategy” by Teresa Appleton. This is provided for example
purposes only and is not a recommendation to include this strategy within your own
trading plan.

Example: Extreme Opening Gap

Strategy Allocation

Replace this text with the percentage of your account at risk for this
strategy.% of total account.

Description


Example: Undefined risk, countertrend move in the direction of an “extreme opening”,
which is also known as fading the gap. The trade generally occurs in the wake of a big
news release and the opportunity is seen frequently near earnings or economic releases.
If the market goes down, look for a buy. If the market goes up, look for a short.

Maximum Profit


Example: The final objective and exit point is the gap fill. The profit potential of each
trade will vary because this is depended on the size of the gap.

Maximum Loss


Example: A sell-stop order is placed at the open of the trade. The maximum loss cannot
be determined, because it is based on information that changes with every trade.


Candidates


Example: E-mini S&P futures

Entry Rules


Example:

1. Use intraday data on a five-minute and 13-minute chart

a. Setup occurs more frequently on the five-minute chart. The signal is
stronger if it occurs on both charts.

2. CCI (commodity channel index) must open +/- 200 reading (use setting of 14)

3. Opening price must be outside the upper or lower Bollinger band (setting 21,2)

4. Stochastics must open less than 20 or greater than 80 (setting 8,3,3)

5. If all criteria are met above, look for a reversal candlestick

a. Gap down reversal candlesticks: hammer, doji, or bullish engulfing

b. Gap up reversal candlesticks: bearish engulfing, shooting star, or doji

c. Once a 5 min reversal bar forms, a break of that bar’s range (either the
high or low) is the entry for the trade.

Exit Rules

Profitable


Example:

1. Once the candlestick moves back within the Bollinger bands, start to scale out of
the trade (specifics for this are missing from the article)

2. Trail a stop loss as the price continues to move through the gap (again, specifics
for this are missing from the article)

Unprofitable



Example:

1. Set a sell-stop below the lows of the reversal bar on a gap down and above the
highs of the reversal bar on a gap up

Back Tested Results

Replace this text with your back tested results for Strategy #3

Back tested results are not included.


Appendix A – The Kelly Criterion

Kelly% = W-[(1-W)/R] *100

Kelly% = percent of account to risk in the market at a given time

W = historical winning percentage (number of winning trades/all trades)

R = historical win/loss ratio (average winning amount/average losing amount)

Example:

Let’s assume: 43 winners; 57 losers

W = 43/100 = .43

Let’s assume the average win is $582; average loss $320

R = 582/320 = 1.82

Kelly% = .43 – [(1-.43)/1.82] *100

=.43 – (.57/1.82) * 100

12% = (.43 - .31) * 100

Trading Plan
Last printed 7/7/2010 12:51:00 a7/p7

Appendix B – Optimal f

Optimal f = ((p(R+1) – 1)/R) *100
Optimal f = percent of account to risk in the market at a given time
p = historical winning percentage (number of winning trades/ all trades)
R = historical win/loss ratio (average winning amount/ average losing amount)
Example:
Let’s assume 43 winners; 57 losers
p = 43/100 = .43
Let’s assume the average win is $582; average loss $320
R = 582/320 = 1.82
Optimal f = (.43(1.82 +1) -1)/1.82
= (.43(2.82) -1)/1.82
= (1.21 – 1)/1.82
12% = (.21/1.82) *100

Trading Plan
Last printed 7/7/2010 12:51:00 a7/p7

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