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Trading Online: Building a Trading Plan

Trading online is difficult, you need a trading plan to succeed. This page will teach you the basic elements of a trading plan help you identify elements that will work for you. The principles outlined on this page are as valid for trading stocks, as they are for online futures trading, or trading forex. However, I am a futures trader, so I will speak as though everything here refers to online futures trading.

What is a Trading Plan?

Trading plans are a set of parameters that you can use to turn inputs into outputs. That is to say, you turn your capital into more capital, by using sound decision making skills. Part of being successful at online investing is being consistent. This is especially true with online commodity trading, as it is highly volatile due to the relatively high leverage. You really can't succeed at online futures trading without a solid trading plan that works to your own personal advantages. I will put out some ideas that you will help you identify what your personal advantages are, but most of the work will come from you and your own experiences.

What is in a Trading Plan?

Trading online with a trading plan consists of three main elements. Choosing a market to trade, choosing a time frame to trade, and choosing a strategy to trade with. The most important element is your futures trading strategy, so let us start with that.

Trading Strategies

There are as many trading strategies as there are car styles to choose from. As you should know, people choose different cars based on their desires and needs. The same goes for trading strategies. It is important to choose a trading strategy that you understand. It has to make sense to you, otherwise you'll be trading in a way that doesn't make sense to you!

I understand the concepts behind MACD divergences and swing trading. The two trading systems are complementary to each other, so it is very easy to use them in sync. I am not going to go into the details of swing trading or MACD divergences, because you can read more about those trading strategies by clicking on the links in the middle of this sentence. It suffices to say, that to build a solid trading plan, you have to identify a trading system that works for you, one that you like and one that you understand.

Again, the online trading strategy that you will use is the single most important element of your trading plan.

It is comparable to a surgery. These days, a surgeon will either be very good at using robots for surgery they will be very good at using hand tools for surgery. However, you don't see surgeons bouncing around between both methods. They choose one that they are more comfortable with, and then specialize. You should do the same with trading strategies. Pick one, and specialize.

Choosing a Time Frame

Again, I won't go into too much detail about how to choose a time frame, because I've already written about it here. However, it is an important element in your plan if you want to succeed at trading online. Trading time frame and the market you will trade are both equally important parts of your trading plan.

To succeed at trading online, your trading time frame has to be congruent with your online trading strategy. For example, you can't trade MACD divergences successfully on 1-minute futures trading charts. It's just ridiculous, at least I think it is. I apply my MACD divergence and swing trading strategies to 60 minute and daily time frames. I use 10 minute 1 minute charts sometimes to pinpoint my entries, but my decision making only occurs on 60 minute and daily time frames. Also, I use weekly charts for analysis, but again, I only make entry and exit decisions on 60 minute and daily time frames.

I don't bounce around trying to find different trades on different time frames, because I know that my trading strategies work well for me on the time frames that I have chosen. It is part of my trading plan for futures trading online, and I stick to my plan.

You can choose a trading time frame by applying your trading strategy retrospectively to markets in different time frames, and seeing which time frame produces the highest win-to-loss ration, as well as the highest winnable amounts. That is to say, you want to find a time frame in which your strategy wins more that loses, and in which the wins provide longer runs with higher dollar values than the wins in other time frames. If you find a strategy-time combination that you feel good about, then make that your time frame in your trading plan.

Choosing a Market

This is a very difficult area to master, because it take time and many committed hours of work and experimentation.

We see these successful fund managers, and how they have vast portfolios of hundreds of stocks in their funds.

These guys are often considered the top dogs in the industry, so a lot of people try to reproduce their trading model. This is a big mistake.

Again, I trade futures, so I'll talk about futures. Pick no more markets to trade than you have fingers on one hand. Do not diversify beyond that. The only diversification you need is to be IN the market, or to be OUT of the market. You should mostly be OUT of the market relative to your time frame.

Why should you only choose five or less markets to trade? Because you want to specialize and get good at something. You want to get really good. You may not believe it, and I don't care what anyone else says, but every stock and every futures contract trades differently. Comparing the way Apple stock trades, to crude oil, to gold futures, to the USDX, to FCOJ futures, is like comparing apples to oranges. Better yet, its like comparing apples to sedimentary rocks. The best thing that you could ever do to get good at trading online is to pick one, two , or three markets and specialize.

How long does it take to get good at one market? You should be prepared to spend one year watching that market at least every day to learn and incorporate that market's trading behavior into your own living being.

The Composite Trading Plan

Now that you know what you need to put together your trading plan, all you have to do is spend the time and energy in a persistent way to get that trading plan working to your favor and make you profits trading online.

No one, not I, not a book, not a seminar can do that for you. What they can do, is help you with the individual elements of the trading plan. There are tons of books on trading strategies and markets to trade. The internet gives you free access to a myriad of markets. Choosing a time frame is something you have to choose through experimentation.

Putting all three elements together, is like trying to play matchmaker between all your friends. You can setup up your friends as much as you like, but in the end, its only the couple involved that will know if they are the right combination. Only you can choose the right combination of time, market, and trading strategies that is right for you.

The Final Secret Element

OK, now for the secret fourth element to your trading plan. The element that will determine your success in trading online. Record and evaluate.

As with any enterprise, you must have a system in place to record your performance. You must then evaluate your performance and modify it accordingly. This is something that you must do consistently over time, and never stop.

There are many ways to record and evaluate your trading online and offline. I like to use a trading spreadsheet. You might like to use something different. The fact is, you must use something.

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