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Your Day Trading Business Plan

It's important for traders to have a business plan

By Brandon Fredrickson
Recorded in the Tradingfrommainstreet chatroom

[18:02] it's a good time for everyone to get their trading business plans together
[18:02] to review
[18:02] all of that good stuff
[18:02] it always surprises me how few traders actually have a business plan
[18:03] I will talk to traders who are not doing well
[18:03] and I will ask them what is their plan?
[18:03] what is your trading methodology?
[18:03] what kind of risk do you take?
[18:03] How do you pay yourself?
[18:03] how do you handle a drawdown?
[18:03] and they have no clue to any of this
[18:03] and yet they wonder why am I having a hard time?
[18:04] because you are competing against Goldman Sachs, Bear Stearns and all the Market Wizards and everyone else
[18:04] and I can guarantee you they have a plan
[18:04] your business plan should be your road map to your ultimate success in trading
[18:04] and needs to include what setups you will trade
[18:04] what markets you will be active in
[18:04] which ones you wont
[18:04] what are your goals
[18:04] how will you get there
[18:05] with me so far?
[18:05] y
[18:05] You cant treat the market as a hobby and expect to come out ahead
[18:05] this is very important
[18:05] Hobbies cost us money
[18:06] I think Mark Cook said it best in Jack Schwaggers Stock Market Wizards: ""If you decide to trade for a living, you have to treat it just like any other business endeavor and go into it with a plan. If you want to start a business, and all you do is walk into a bank, smile pleasantly, and ask for a $200,000 loan, do you think you will get it?
[18:06] Are they going to say say, ""You have a really nice smile; here's the money"". I don't think so. You need to have a business plan. The trouble is most people start trading without any definitive plan.""
[18:07] most people will fail as traders
[18:07] and in most cases it is because they don't know exactly what they want, or how they are going to get it.
[18:07] Many traders do realize the value of having a daily plan and they will spend some time scanning and looking at the news etc., but for some reason very few take put very much time into the big picture.
[18:08] Unless you would call the big picture ""Make a lot of money, retire to a beach house in Malibu"" a plan.
[18:08] The lack of a map to Malibu leads most traders to get lost in the desert on their way to the beach.
[18:09] A business plan should include your primary goals.
[18:09] I took mine straight from Trader Vic- Methods of a Wall Street Master by Victor Sperandeo.
[18:10] That is, my primary goal is the Preservation of Capital.
[18:10] This should be obvious since no one is going to buy their house in Malibu if they lost all their money in the market.
[18:11] The next goal is consistent profitability.
[18:11] Hopefully at some point trading can represent your primary source of income. Because of this you want to be consistent as possible in your profitability.
[18:12] No is going to make money all the time, but you want it to be as steady as possible because we all have bills to pay.
[18:12] The final part of it is ""the pursuit of superior returns"".
[18:13] This also should be fairly self explanatory.
[18:13] If I could put my money in an index fund and do better then I can by managing it myself, then I would be much better off doing that and keeping a job.
[18:14] Then, I could continue to add money to the index fund on a regular basis, not have to live off it, and eventually I would be (in theory) very rich.
[18:14] Now to get accomplish all of these things, you have to settle a few other issues.
[18:14] Where will I trade?
[18:15] There are offices all over in big cities you can go to (though many fewer then even a year ago)
[18:15] many people will do a lot better in this environment then they would in any other.
[18:15] It feels more like going to work then sitting in the spare bedroom, so for some people it is MUCH easier to actually work then.
[18:16] For others they need the physical social interaction that a live room of traders provides.
[18:16] other people want to trade from home and ""do it in their boxers""
[18:17] for many people this represents the ultimate goal of sorts, though I would caution to those of you working from home it is easy to become distracted by the every day going ons of the house.
[18:17] You need to be always vigilant that this is not happening to you, because when it does your profits will suffer for it.
[18:17] After you figure out where you will trade, you need to know what you will trade?
[18:17] Stocks?
[18:18] Emini's?
[18:18] Commodities?
[18:18] Bonds?
[18:18] Currencies?
[18:18] some mix of these?
[18:18] Maybe you will trade the Emini's
[18:19] or maybe you will trade US traded equities. Specifically perhaps you will have a basic of the 200 most liquid stocks which are heavily followed by institutions and you will look for patterns in those.
[18:19] How long are your trades going to last?
[18:19] This really depends on your personality.
[18:20] Im most comfortable when I don't have to hold a trade for a long time unless its in the commodities.
[18:20] so for me my trades will generally last less then 15 minutes.
[18:20] Im a very short term trader.
[18:20] What patterns will you use to enter a trade?
[18:20] so many people try to be the jack of all trades in the market
[18:21] and ultimately they just end up the master of none
[18:21] and eventually they are ex traders
[18:21] you will do far better to choose something between 1 and 5 setups
[18:21] and master those
[18:21] ignore everything else
[18:21] and focus on your bread and butter
[18:21] built it slowly
[18:21] and eventually it becomes something to really be proud of.
[18:22] How will you place your orders?
[18:22] How much will you chase a setup?
[18:22] generally in a stock im willing to chase it between 2 and 5 levels
[18:22] and in the Emini Nasdaq 1 point, and the SP about 1/2 a point.
[18:22] Will you use limit orders? or market orders?
[18:22] What broker are you going to use?
[18:23] How much is this going to cost you?
[18:23] charting and execution
[18:23] what kind of computer connection are you going to have?
[18:23] back up?
[18:23] everyone with me so far?
[18:23] y
[18:23] yep
[18:23] y
[18:24] yes
[18:24] y
[18:24] Risk management is a critical part of your plan.
[18:24] How will you handle a drawdown
[18:24] How will you decide when its time to take time off.
[18:24] Taking time off is not being defeated.
[18:24] its living to fight another day
[18:25] include something that keeps you from trading (or at least reduces your activity) during times of severe stress.
[18:26] This would include poor health, divorce, death in the family.
[18:26] Things like this.
[18:26] Trying to trade in any of these kind of situations and you really might as well drive to Chicago and stand outside the Merc in the morning.
[18:26] when you see the guys with a floor badge walk by, just offer to write them a check.
[18:26] It will be easier, you wont feel like you worked so hard to give it up.
[18:27] but that's what you will be doing anyway.
[18:27] You also need to have some sort of daily routine.
[18:27] When are you going to arrive at the office?
[18:27] What will you do when you get there?
[18:27] when do you take breaks?
[18:27] How late do you stay?
[18:27] plan your entire day
[18:27] be the worst boss you ever had
[18:27] and you will probably be one of the best traders out there.
[18:28] How are you going to exit your trades?
[18:28] I like to exit mine in chunks.
[18:28] Take some of it off when my risk is covered and try to get a little bit more on the rest.
[18:29] What is your trailing stop methodology?
[18:29] How much capital are you going to have in your trading account?
[18:29] And how are you going to allocate the risk with that.
[18:29] by allocation of risk I mean how many contracts will you trade for X amount of dollars?
[18:29] For myself, Im very comfortable with trading 1 Emini Contract per $10,000 of trading capital.
[18:30] If I feel slightly more aggressive I will take it down to 5K
[18:30] and if I feel less so I will bring it down to 20K per single contract traded.
[18:30] you can consider outside factors in this.
[18:31] for example, if you have a net worth of $3 million and you keep 50K in your trading account, you might be plenty comfortable to trade 1 contract for every 2000 in your account.
[18:31] That would probably be fine in that situation, but for most people it would not.
[18:31] So, there will be some variance, overall though I think that 10K per contract is the best in most cases.
[18:31] It allows you to make a lot of money if you average just a little bit a day.
[18:32] one thing i have put in as well is that I want a certain number of trades per day.
[18:32] On most days there are between 2 and 5 good swings in the market that you can get if you are trading the indexes.
[18:32] I tend to swing to extremes
[18:32] I will be either lazy and not trade that much
[18:32] or too active and take 20 in a day
[18:32] so I have a number that I want to hit each day on the trades
[18:32] I like to get 3 to 5 trades in each day
[18:32] I feel this gives me the best chance to hit my goals
[18:33] What are your goals?
[18:33] Be specific in this
[18:33] and commit too it
[18:33] how much money do you want to make this year?
[18:33] evaluate it
[18:33] keep making progress
[18:33] don't beat yourself over the head about it
[18:33] but keep making steady progress.
[18:34] anyway, this is what I have for tonight for you guys. I hope it gets some idea's rolling for you all.
[18:34] As I said earlier today, I had 33 business plans sent to me, and then today I got 2 the total is now 35.
[18:34] This is excellent
[18:34] each person who has one is increases their overall odds of success greatly.
[18:34] thanks Brandon
[18:35] b - could you circulate one or two with your comments (if they agree!)
[18:35] I will look at each one of them, but it takes several hours to go over each it might be into the first part of next month before i get to yours..but I will.
[18:35] yes
[18:35] I have woodrows up..but I don't recall the URL
[18:35] I will try to find it.
[18:35] i found woodrowkwc's very helpful!
[18:35] great info
[18:35] B
[18:38] any questions or comments?
[18:39] <_china219> great class
[18:40] sorry got discod there for a sec.
[18:40] have had inet trouble this week.
[18:40] Thank you China.
[18:41] b - how do you factor in the improvement factor? You're going to get better through time - how much do you think?
[18:42] set your goals higher, start to transact in larger sizes, try out new markets.
[18:42] just things like that is how I approach it.
[18:43] any other questions or comments?
[18:44] what is the best setup for a beginning emini trader to get started with
[18:45] let me find something for you
[18:45] this would take about an hour to type
[18:45] but I have something posted about it, I just need to find it.
[18:45] give me just a second.
[18:45] to give you an idea on your net results schroe on just a little improvement
[18:46] Lets say your setups are 50% reliable with 2/1 reward/risk
[18:46] 100 trades
[18:46] 50 winners for lets say 10 units = 500 units
[18:47] 50 losers for 5 units losses = 250
[18:47] net profit 250 units
[18:47] now
[18:47] let's change it a little
[18:47] and your setup is 60% reliable
[18:47] 60 winners for 10 units = 600
[18:47] 40 losers for 5 units = 200 units
[18:48] net profit now 400 units
[18:48] and the neat thing is you can reduce the $$ per each contract traded as you gain confidence.
[18:48] so for 10% improvement in reliability of your setup
[18:48] you nearly doubled your net profits
[18:49] pretty cool
[18:49] trade more contracts with the same $$$
[18:49] it pyramids
[18:52] I generally look for reward to risk ratio of at least 1.5/1 for myself
[18:52] and more likely 2/1
[18:52] but sometimes I will go as low as 1/1
[18:53] all with your 15-5?
[18:53] I use a couple other setups
[18:54] but the 5/15 is an idea you can move up the time frame ladder
[18:54] in fact yesterday I had a 15/30/60
[18:54] i use a 10/5/2, but same idea
[18:55] I will trade Phoenixes and Avalanches
[18:55] and flags
[18:55] Aikidoman, thanks for R/R refresher
[18:56] B - to django's question, don't you thing phoenix and avalanches are "relatively" risk free? You're not catching a falling knife.
[18:56] no you are not catching a falling knife
[18:57] it has already proved itself somewhat that the reversal is likely
[18:57] not completely
[18:57] well as soon as I find something that is risk free
[18:57] but that it is likely
[18:57] I will be a hell of a lot closer to Malibu then I am here in Iowa :)
[18:57] lol
[19:04] B, read your class from link above, did u ever do that class on gaps?
[19:04] there are a few on the site
[19:08] If you specialize in Phoenix and it necessary to specialize further in stocks or futures? Could you conceivably trade both these markets and expect to be successful?
[19:08] most people will not be successful trading both until they are successful trading one of them.
[19:09] so, when you start, you should do either one or the other
[19:09] for a beginner it seems natural to start on the stock side
[19:09] I would argue that recently the mini's are much more favorable
[19:09] it forces you to focus on one thing and not get distracted
[19:09] interesting...even though the ticks are .25 or .50?
[19:10] It seems so much faster
[19:10] also the leverage allows you to get something out of the moves.
[19:10] just trade a one lot
[19:10] and puts a premium on order entry skills
[19:10] the .25 is only $12.50
[19:10] or the .5 in the NQ for $10
[19:10] B, r phoenix and avalanche plays normally used with 2 min charts?
[19:10] OK B I'm hearing you
[19:11] they will work well in any timeframe
[19:11] but once you get below a five minute it tends to all be more scalpish.
[19:11] B how important is reading the tape for trading phoenix/avalanche and how does a beginner develop this skill?
[19:12] same question for bear/bull flag if it's a different response
[19:12] B, which time frame would you use if you were just trading 1 contract ES?
[19:13] I think that for any trading tape reading is an important element
[19:13] and its a skill that, unfortunately, you are only going to get by practicing it.
[19:13] I'm finding that hard to learn while trading alone
[19:13] so just watch them around key points and get used to how they act.
[19:13] yes it can be a challenge.
[19:13] Feel free to send us private messages during the day
[19:13] or ask questions in the room as you need
[19:14] there are a lot of people in the room who are very successful as traders
[19:14] and they have been very helpful to people.
[19:15] [22:16] B, which time frame would you use if you were just trading 1 contract ES?
[19:15] That brings up an interesting point, often when I get unsolicited is extremely appreciated but i find myself asking how much weight to put behind the advice
[19:15] there are many many ways to trade....and no one timeframe is really that much better than another
[19:15] I think some of your things in the survey are going to address that though if memory serves correctly
[19:15] it all depends on your style of trading
[19:16] Aiki, if prefer shorter time frames.
[19:16] yes they will
[19:16] I tend to be up on a little bigger a timeframe than Toni, Brandon or Ivica as I am not a very good micro micro scalper
[19:16] I'd really like to understand who is doing well in the room, but that is not something you can ask :-) I assume if they were given permission to talk in locked channels then they are making money
[19:17] And I don't mean that from a nosy perspective, but just a who to listen to perspective
[19:18] who to listen to....anyone who is a breakeven trader or better is a great trader
[19:18] Aiki, I have never seen an Phoenix or Avalanche play on a 5 min chart, i have only seen them on 1 and 2 minute charts.
[19:18] B will there be anything on the survey regarding perhaps a dedicated channel to certain setups?
[19:18] what
[19:19] lol
[19:19] there are plenty of Phoenix and avalanches on 5min charts
[19:19] I see em on 15min charts
[19:19] even on weekly if you trade long term
[19:19] Aiki, I would love to see what one looks like!
[19:19] on 30min charts
[19:19] To have 50 sets of eye scanning for avalanche and phoenix setups would be terrific
[19:20] Toni and Ivica usually mention them
[19:20] quite often
[19:20] it's not an uncommon pattern
[19:20] im not sure about that makityrs
[19:21] but we will be open to suggestions that members have
[19:21] and I also trade a variation of the Phoenix that occurs regularly at reversal areas on 5min and 15min charts
[19:22] Aiki, what is that?
[19:22] B have you ever considered getting members together? I'd make that trip in a heartbeat if it were put together
[19:23] we tend to have get togethers at the expo's
[19:23] and everyone is invited to those
[19:24] could you publish a calendar for the room?
[19:24] that could be helpful
[19:24] I think we could do that
[19:25] Aiki, can you find any recent examples in either the es or nq that I could go back and look at on a chart?
[19:25] ive got to get some scanning done so i can be to bed before 2am guys
[19:25] A weekend focusing on your setups and maybe a Monday of live trading for members who have been around for more than 3 months or so would be tremendous
[19:25] so i will see you all tomorrow
[19:25] Bye
[19:25] had a nice class tonight
[19:25] very nice session, B
[19:25] thank you guys for coming and participating
[19:25] thx
[19:25] thanks B
[19:26] ask me in the morning makityrs
[19:26] <_china219> thank you
[19:26] I am on my home computer, and not my trading computer
[19:26] Thanks B
[19:26] Aiki, great thanks, i will catch you tomorrow morning.
[19:26] Aiki thanks for the good info throughout
[19:27] thanks B
[19:28] the most important a new trader can learn
[19:28] is money management
[19:28] and it's affects
[19:32] I'm learning that lesson. I'm used to swing and position trading, but new to emini daytrading and being sloppy with exits
[19:34] the lesson on money management is the same for index e-minis trading and stock trading
[19:34] remind me
[19:34] I will review the lesson tomorrow at lunchtime
[19:34] sure, thx
[19:34] it's important
[19:35] so someone make sure to remind me
[19:38] My problem is not being used to trading the smaller timeframes, I should probably pull back a bit and only trade 5min and up
[19:38] I cant trade the smaller timeframes either django
[19:38] so
[19:38] I don't
[19:38] it's not my edge
[19:40] How do I replay chat I was gone
[19:42] type /msg services replay #chat