Tuesday, July 15, 2014

Establishing a Trading Plan - Part 3 - My Strategies

This is part 3 in my Establishing a Trading Plan series.

My Trading Plan includes a section that documents the specific trading strategies that I am allowed to use. For each of the trading strategies in my plan I describe:
  • The type of strategy it is (e.g. short, medium, long term trade, trend following, momentum...)
  • The conditions I look for to ENTER the trade
  • The conditions I look for to EXIT the trade
  • The instruments (indices, stocks, exchange traded funds, etc.) that I will use in the trade
By planning out the types of trades I am looking for I achieve several things:
  • More confidence to enter a trade when the situation clearly meets my criteria
  • More disciplined in entering and exiting a trade based on clearly established rules
  • Learn which types of trades work best for me
An example of my Short Puts on Blue Chips strategy is illustrated below.  Keep in mind that my strategies are likely different from anyone else's.  There is no right vs. wrong as everyone has a unique style. What matters is having a plan that clearly defines what strategies the trader will use.

Short Puts on Blue Chips Strategy

Description

Write options to consistently collect premiums.  Only trade on stocks I would like to own in the event the options are exercised.

Entry Rules

These conditions must be in place for me to enter the trade:
  • Stock price is has NOT gone up for 3 consecutive days
  • Earnings announcement is not within 14 days
  • I do NOT already own shares in the company
  • Write a Put Option (or a Put Spread) that is anywhere from 2 - 6 months until expiry
  • Select a Strike Price that is near the recent support level
Exit Rules

I will exit the trade under these conditions:
  • I can close the position and collect 50% or more of the premium within 1 month of entering the trade
  • I can close the position and collect 80% or more of the premium anytime before the week of expiry
  • If none of the above conditions occur, I will wait until the option expiry and take assignment of the shares if needed
Instruments
  • Large cap, dividend paying stocks such as PG, KO, JNJ, MCD

Again, the above is just an example of one type of trade I look for.  In future posts I will describe the various Trading Strategies included in my plan in more detail.  Stay tuned...

Related Posts:

Disclaimer:  This web site and the information contained in the posts are my personal opinions.  I am not a financial advisor.  Don't take this as advice on what specific investments you should enter into.  Do your own due diligence and make your own decisions!

Thursday, July 10, 2014

Establishing a Trading Plan - Part 2 - Setting Goals

(This is a continuation of my previous post:  Establishing a Trading Plan - Part 1)

Having clear and specific goals helps keep me focused (sadly, I probably learned this the hard way).

I originally assumed that there was only one goal for all trading plans - to make money.  While this may be true at a very high level, I now find setting goals directed towards my approach to trading much more useful.

Examples of goals that focus on my trading approach:
  • Learn and try new trading styles and approaches
  • Test the boundaries of my risk tolerance
  • Consistently be disciplined in all my trades (for example, obeying all my stops and rules)
Having goals that are not purely profit related helps me focus on improving my approach to trading.  This seems to align with most of my research and reading about other traders who consistently caution against setting profit targets as goals.  The advice generally seems to be that if I follow a sound approach, positive results will follow.

The key thing to remember is goals can change.  I plan on reviewing and adjusting my goals periodically to bring focus to the areas of the trading I want to work on.

Wednesday, July 9, 2014

Establishing a Trading Plan - Part 1 - Outline

One of the most important things I've come to realize through my own experience as well as reading the insights of other experienced traders is the importance of establishing a trading plan.  (duh, having a plan is probably a good idea for any venture!)

What is a Trading Plan?  

To me, a Trading Plan is simply a document that outlines:
  1. What are my goals?
  2. What is my approach to trading?  What set-ups will I look for to trade?  What stocks or indices am I going to trade?  What are my rules for entering and exiting a trade?
  3. What is my risk management approach?
Why have a plan?

Many of you are probably thinking "I already know my goals, strategies; writing them down is a waste of time!"

Trust me, taking a plan that is was "in my head" and formalizing it into a documented Trading Plan made a world of difference.  Having a formal, documented plan helps keep me focused, disciplined and mitigates the "random gut feel trades".

In future posts, I'll describe in more detail what I include in my Trading Plan...

See my next post on Setting Goals

Getting started again...

After a long hiatus I thought it would be a good idea to resurrect this web site.  Unlike the previous incarnation, this time I will focus on documenting my thoughts about trading and investing.  

Why am I doing this?  Mainly it's to formalize my thoughts and track my own progress.  By writing things down I believe it will make everything more accountable and allow me to reflect on me trading and investing performance.  Hopefully, readers who stumble across this site can share in my experience and gain something.  Who knows!

What are my goals?  Simply put, it is to consistently generate income through trading and investing.  Eventually I hope to build enough capital and skills to retire!!!

In future posts, I will cover topics such as:
  • Trading (which I define as short-term, speculative type trades based on specific set-ups and anticipation of short-term price movements)
  • Investment (which I define as long-term accumulation of growing passive income streams; mostly through individual stocks and ETFs)

I encourage you to check back often and provide comments...

Thank you!