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    My own trading plan


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    In my previous post I talked about the general way the trading plan should be created for yourself. If you have read it, then you have seen that in order to create a good trading plan you do need to be pretty much 100% honest with yourself an usually you wouldn’t really like to share it with anyone else. But in my case I will have to humiliate myself a bit and say it all out loud, right here. Don’t laugh! Or if you do, be sure to post your constructive criticism to the comments section. This trading plan is to be followed up after couple of weeks of trading on my test account. O.K, here we go.

    General plan & theory

    My main goal is to become a successful trader, to be among those 10% who is actually capable of making money in financial markets, to become financially independent (meaning that while I don’t neccessarily need to become rich, I do want to get to the point where money does not matter anymore). As my current main job as a web published does allow me to commit enough time (full-time if needed) to just trading, analysing etc then even though it is suggested that in order to become a successful trader, trading can’t be your second job, I can keep doing also my current job. I can put anywhere between 4-12 hours a day into trading.

    I want to start as a short term trader, meaning that I will not hold positions overnight. I choose foreign exchange as my first market to trade on because it gives me good leverage, does not require too big initial capital and also pattern day trading term does not apply to foreign exchange. I will be trading main pairs such as EUR/USD, GBP/USD, EUR/GBP and also JPY/USD. Possibly also AUD.

    My main strength could be willingness to learn which I have proved within the past months when I have learned about financial markets and analysis methods as a whole. And from years of experience I know that I’m a capable self-learner. I am also able to make decisions based on analyses rather than emotions and I have proven that to me before. My weak point is most likely discipline and irresponsibility. Yes, I am aware that these are pretty bad weaknesses especially when talking about short term trading, but the irresponsibility mainly shows itself by just making me too lazy sometimes. But when I do something then I do try to make it right. So irresponsibility in here means that I might not make trades every day. But when I do make them, I will make all the analysis I have put myself to make. My weak point might also be frequent mood changes which might affect my trading decisions, but in order to avoid that, I will keep in mind that I should not make any trades with bad mood. I also need to keep in mind that I should trade according to my trading plan which will set my limits, goals, methods for analysis and everything related. As weak point I can also bring out that even though I can consider myself book-smart at this point, I do not have any practical experience as a trader yet, thus for first weeks I will be “paper trading” on my Easy Forex account with killer spreads and $50, just to gain practical experience.

    In order to get into better physical and mental shape I will also try to change my life in order to reduce mood swings, get into better physical shape, etc – like they say, in order to be intact, you need to be fit both mentally, physically and spiritually. Don’t get me wrong now, I’m neither a God worshipper nor Satan’s, but all these things are important in order to be happy and being happy makes it easier to make right decisions.

    I understand that in order to become a really successful trader, I need to make a commitment and become mentally more stable. Again, don’t get me wrong, I’m not a nutcase, but still…

    My income goals might sound kind of unrealistic, but having learned about financial markets with these goals in mind, I will not change them at this time. But this is something I am willing to change once I get more practical experiences on financial markets. I expect to make 2-5% profit every day. My monthly goal is to make at least 30% (considering I possibly won’t be trading every trading day ). Should I manage to do that, each month I intend to take out 10% of it (not 10% from the profit but from that 40%, so that 30% of the profits will be reinvested). I am ready for the great possibility that for the first couple of months I will take loss instead of any profit, possibly lose my initial deposit totally, but I am committed to make these losses profitable to me in the meaning of knowledge.

    Within the next days/weeks/months I will keep learning about financial markets, generate more knowledge about foreign exchange, plus learn about futures, options, commodities. This is all definitely required in order to really become a winning trader. For learning I will keep reading books, forums, websites.

    When I finish a month by achieving my financial goals I will reward myself by going abroad for couple of days to take a break of it all.

    My trading decisions are going to be based on technical analysis. Main method and trading platform is to be specified after I have tested everything on my test account for couple of weeks. I will keep a journal of my trades right here in Learning To Invest under the new channel Forex journal.

    Note that this trading plan really is the first version of it and I expect to make a number of changes to it during the next weeks, to make things better, more realistic, more specific.

    Every Morning I will be checking the markets for the following:

    • what is USD doing compared to other main currencies;
    • what is EUR doing compared to other main currencies;
    • what is GBP doing compared to other main currencies;
    • what is US stock market doing ((confirm stocks primary trend with dow’s industrials and transportation));
    • what is London stock exchange doing;

      „Minor trends can last anywhere between couple of hours to two weeks”(just to remind myelf that5 minutes isn’t a very reliable minor trend)

    Websites that might be worthile to look every once in a while

    · http://research.stlouisfed.org/index.html for news

    · http://www.ft.com/markets/currencies for news

    · http://online.wsj.com/public/us for news

    · http://www.forbes.com/ for news

    · http://bestcalls.com/ track event schedules for thousands of companies (just for fun )

    · http://www.prophet.net/ - technical analysis tools for traders 

    · http://www.earnings.com/highlight.asp?client=cb

    · http://finance.google.com/finance

    · http://www.investorwords.com/ for help with trading terms.

    Economic Calender

    Trading strategies I’m about to use are still to be updated. I will start up by trying different technical indicators, patterns and before depositing money to new trading platform and I hope to make decisions about the exact techniques I will be using. Below is the initial set of technical analysis methods that I will start testing for myself. Also information about my money management can be found in the end of this post.  

    First things

    I need to make sure I trade on markets that are open, so in case of EUR/USD both markets should be open. Trading hours can be found from here.

    Trading should be done in the direction of the MAIN or INTERMEDIATE trend.

    Things to consider

    • volume – volume is bigger in direction of the primary trend and decreases during counter-swings. For confirmation purposes ONLY.

    • Intermarket analysis. US Dollar is Opposite to CRB Index. US Dollar moves US stock market in the same direction as well. Strong US Dollar keeps commodity market in downtrend. CRB index and bond prices are usually in the opposite trends. Usually forex and treasury bill bonds are moving in the same direction. In easier words – stock market is sensitive to bonds market (interest rates); The bond market is influenced by commodities market (inflation expectations). And the inflationary impact of commodities is determind by trend of U.S Dollar. So it’s a long relationship – US Dollar to commodities, commodities to bonds and bonds to stocks. Rising dollar produces lower commodity prices which lead to higher bond prices (lower interest rates) which leads to higher stock prices. Gold is the most sensitive to US Dollar and due to that fact gold market leads turns in the CRB Index. So rising dollar means almost immediately falling gold price and vice versa.

    Technical analysis

    Charts to use

    • candlesticks
    • bar chart
    • line chart

    Confirming trends

    • Trendlines (line chart)
    • Moving averages, 50-day EMA
    • Aroon. If value in case of either Aroon is above 70 then it indicates strong trend, direction depends on which Aroon is above 70. If Upper then uptrend, if lower then downtrend. If value in case of either Aroon is below 30, it is an indication that strong trend in the opposite direction is coming. If upper Aroon slightly goes below 50, it is an indication that the current uptrend has lost its momentum. Vice versa in case of Lower Aroon.

    Indicators to use and why

    • OBV – On balance volume. Line is moving up then volume is bigger on bullish days. If price and OBV are both going up, good indicator. OBV can often suggest a price move before it actually happens, but again, be sure to wait for confirmation from the other side.

    • Simple Moving averages. 5 & 9 days, 10 minute and 1 hour.

    • Momentum oscillator. 7 day. If the momentum indicator is above the midpoint line and it is rising at a steep rate, it indicates a strong momentum.

    • RSI – Relative strength index (14 days).

    • Money flow oscillator?

    • Bollinger bands. Should be used with RSI. . For example, if the price touches the upper band and RSI is below 70 then this is an indication that the trend will continue. If the price touches the lower band and the RSI is above 30 then this is also an indication of trend continuation.

    • Williams %R. It is used to find overbought and oversold levels in non-trending markets. Readings below -20 are considered overbought and readings above -80 are considered oversold. Time period 14 days. Williams %R is considered to be a leading indicator – meaning that the line of Williams %R gets to the top or bottom before the price does. Should be used during trending periods.

    • Parabolic SAR. Should be used during trending periods, provides useful entry and exit points. If the trend is up, buy when the indicator goes below the price. If the trend is down, sell when the indicator goes above the price. ( might need some more explanation for myself ) 

    • Elliot Wave Principle.

    • Average True Range – ATR. High ATR values are often visible in market bottoms. Low ATR values are often visible during extended sideways periods in market tops.

    • Chande Momentum Oscillator – CMO. Overbought level appears above or equal to 50 and oversold below or equal to -50. Find entry and exit point if used together with a moving average. For example 20-day CMO and 9-day moving average. When CMO crosses above the moving average, it’s a Buy signal. Sell when CMO crosses below it.

    Chart patterns (line charts)

    • Doubble and tripple bottoms and tops which are support and resistance areas. Longer time period is between the tops or bottoms, the bigger REVERSAL can be expected.

    • Key reversals – look for previous day’s trading range. If there is a lower intraday low than the previous day’s intraday low and where the close is above the high of the previous day then then Upside reversal is expected.

    • Head & shoulders.

    • Rounding tops and bottoms. When you check if you can form any half-circles of the tops or bottoms. If about a quarter of a full circle is completed you can expect increase in price ( or decrese accordingly ). Note that if at some point the circle is continuing to move in a straight manner then you can expect a reversal trend, often in case of uptrends it pretty much crashes now. In case of a true Rounded Bottom, the volume decreases as the price decreases, which means the selling pressure is decreasing. As the price movement becomes neutral and goes sideways you will see that there is very little trading activity and volumes are very low. Then, as prices start to increase, the volume increases.

    • Rectangle tops and bottoms. Rectangle pattern is formed by two horizontal lines that connect a number of highs and lows in about the same price range.Rectangle pattern is often like a sideways movement before the continuation of the primary trend. The rectangle is good in view of seeing the down and upswings above or below the rectangle. If the rectangle formed after a decline and the direction of the breakout is up, it is a rectangle bottom. And vice versa. If there has been two consecutive closes or 5-7% change above or below the rectangle then you should invest your money in the direction of the breakout.

    Chart patterns (candlesticks)

    • Marobozus (filled is extremely weak candlestick, empty is a strong one), it’s a candlestick without any shadows.

    • Doji – can indicate a change of trend. No real body, or just a small one.

    • Hammer and hanging man. Small body without a upper shadow and something like 2 times as long as the body is lower shadow. Empty body (hammer) is bullish, filled body (hanging man) bearish.REVERSAL.

    • Engulfing pattern. Reversal pattern.

    • Harami & Harami Cross. Reversal pattern.

    • Doji Stars. Gap between long body and Doji required. Reversal pattern.

    • Morning and Evening Star. Reversal pattern.

    • Abandoned baby – like morning and evening star, except the star has a bigger gap between both first and third candlestick AND the star is now doji. Reversal pattern.

    • Upside Gap Two Crows. Reversal pattern.

    • Meeting lines. Two long bodies of different color (one empty, other filled) with same closing prices. First body empty or filled according to the previous trend. Reversal pattern.

    • Three white soldiers and 3 black crows and three identical crows and deliberation and advance block (all have pretty much the similar idea). Colors of the long bodies should be opposite color and direction compared to the trend. Reversal pattern.

    • Homing pigeon. Bullish reversal pattern like harami, only both bodies are filled.

    • Beginning of Continuation patterns. Tasuki gap. There’s a gap between two candlestick with the same color (in the direction of the trend). The third candlestick opens within the second body and closes WITHIN the gap.

    • Side by side white lines. Continuation pattern.

    • Separating lines. Two candlesticks with opposite colors, exactly the opposite to Meeting Lines we have talked about before. The first day should be the OPPOSITE to the current trend. Continuation pattern.

    • Upside and downside gap two methods (I call it BONGO). Gap between first two bodies empty or filled depending on the trend. Third body opposite color that opens within the second candlestick’s body and closes within the fist candlestick’s body – meaning it also fills the gap. Continuation pattern.

    • On neck, in neck and thursting bearish patterns. Continuation patterns.

    • GAPS.

    Money management

    • I will put 2 % of capital to any one trade (during the test period on my $50 account it will be 10%)

    • Risk/reward ratio will need to be at least 2:1 (during test period it might have to be often 1:1 due to the 10 pip spread on the mini account)

    • I will also try to bring probability theory to the game, but right now I’m not 100% sure how I will do that.

    • I will call it a day after my daily 3% goal has been reached (lets take that as a avergae between 2-5...) OR I have made 10 trades.

    • I will call it a day if I have lost 2% during the day or made 5 losing trades in a row. Now it’s time to analyse. Note that with my test account, I will call it a day after winning $10 or losing $10.

    • I will allow myself to end losing trades before the stop loss is reached. But this case I will keep my eye on the currency to see if it was a good idea or not.

    • I will NOT allow myself to increase the stop loss limits for the sake of good money management.

    • I will allow myself to keep maxiumum of 3 open trades at any time in order to follow each one correctly.

    Developing my own trading method

    During the test period I will try to put together couple of different trading methods for myself, methods that during the test period have produced the best results.

     


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