Tuesday, 3 June 2008

Trading Business Plan - The Way To Trade Like A Pro!

My research and observations overwhelmingly indicate that to make a good living out of the share (stock) market, a well thought-out trading business plan is a must have.

All top traders seem to have their own trading business plan. It allows them to trade in a business-like and professional manner. I am convinced that it is the only way to make consistent and significant money in this industry.

As I am planning to get back into trading in the next couple of weeks, I have created a new business plan for it.

Having a business plan is all well and good, but it would be of no use if I don't have the discipline to execute it. I have been burnt a few times from trading in the past, but I realise now it was because I didn't have the discipline to stick to what worked for me. So hopefully I have learnt from past mistakes!

theKimsta Trading Business Plan

1. Objective

a. To make consistent and significant money trading in the Share market in a professional and business-like manner.

2. Initial Setup

a. Effective Date: 01/06/2008.

b. Starting Capital: $10,000 cash (to be transferred from cash savings account).

3. Trading Platform

a. Leverage using Contracts For Difference (CFD).

4. Return Objective

a. To make at least 52% return on capital per annum (or 1% per week, on average).

5. Risk Management

a. Maximum Risk per Trade (RT) = 5% of position.

b. Maximum Risk on Capital per trade (RC) = 2% of capital.

c. Position Size (PS) = Risk on Capital per trade (RC) / risk per trade (RT)
E.g. PS = (2% x $10,000)
/ 5% = $4,000 per trade.

d. Stop loss must be placed at time of trade based on RT (5%).

e. Trailing stop loss should be set at RT (5%) with 2.5% increments.
That is, stop loss should be moved up at every 2.5% gain in price.

f. Stop loss must only be moved up with share price, never down.

g. Do not add to a losing position, unless intentionally scaling in to fill a predetermined order.

h. At least 50% of trading capital must be maintained as spare equity.

i. Maximum number of open position (OP) at any one time is given by:
OP = (50% x capital)
/ (Average Margin* x position size).
E.g. OP = (50% x $10,000) /
(10% x $4,000) = 12.5
*Average Margin is assumed to be 10%, that is, 90% Loan-to-Value Ratio (LVR).

6. Trade Duration and Direction

a. Trade duration can range from a several days to several weeks.

b. Trade position can be either in the “long” or “short” direction.

7. Share Selection

a. Shares from the ASX200 index only, with CFD margin of 5% or 10%.

8. Trade Strategies

a. Dividend Yield Play (DYP) - in a bull market.

b. Trend following, using multiple moving averages (MMA) and Renko chart patterns.

c. Candlestick chart patterns.

d. 50% Retracement patterns.

9. Time of Business

a. Research, analysis, and order placements should be conducted after normal working hours, e.g. around 7-10 pm during the night.

b. Avoid trading or monitoring market prices during business hours, unless not at work.

10. Monitoring & Record Keeping

a. Records of trades shall be kept in a separate spreadsheet (e.g. shares, position size, open date, exit date, brokerage, interest, dividends, etc.).

b. All expenses relating to trading business should be kept for tax purposes.

11. Tools And Resources

a. BullChart charting software, plus end-of-day data subscription.

b. IG Markets CFD trading website.

c. Ex-dividend watchlist email service.