Indicator Wisdom 10
Next step: Measure percentage retracements.
Let’s start with developing a normal work day routine.
I have written many business plans in the past two decades, some complex and running into several hundred pages, covering issues relating to corporate profiles, shareholder structures, strategies, financials, and growth plans. A trading business plan is important, but should cover two main issues, namely those relating to personal daily routines and, second, issues relating to the trading business itself.
These two topics are set out in the following text.
Your Trading Business Plan
Definition: A business plan is a formal statement of a set of business objectives, reasons why you believe these can be achievable and a set of strategies to reach such goals. It usually contains data pertinent to capital providers, such as (among other) background information about the organization, directors, and financials.
Private Issues
You are about to enter a complex financial world where greed, panic, and hope are often the order of the day and usually takes place at the blink of an eye. I have told the story before: a colleague spent 12 hours watching markets—nothing happened. He decided to take a 10-minute break. Guess what happened? In those 10 minutes, the stocks he had invested in had fallen by a staggering 20 percent as the World Trade Towers fell in 2001.
In 10 minutes, he had lost an unbelievable $5 million. To make matters worse, his portfolio was not diversified and the shares that fell represented 60 percent of his portfolio, so he lost—in that 10 amazing minutes—50 percent of his entire wealth.
Not to put a finer point on the issue, I asked him if he had a business plan to set out how and when he should trade. He just glared at me, which in itself was an answer. He seemed to have ignored the premise that trading is a business where people lie, cheat, and create rumors just to influence share prices. In addition, professional traders can today trade for clients and simultaneously for their own book. Many market observers say that this is a conflict of interest and often creates unrealistic share movements in favor of brokers and thus to the detriment of private clients.
Maintaining a positive attitude during such trying times is in fact extremely vital for success, and negativity is one of the greatest challenges a trader must overcome; especially when massive wars, or earthquakes or famine render economies useless. In addition, I have been seeing successful traders doubt themselves at crucial times and that loss of confidence—no matter how brief—renders traders useless.
You cannot expect to succeed in the long term if you cannot see trades in an objective and unemotional manner. If you lack confidence and skill to take logical trading steps without hesitation, then I suggest that you look for a less tense career.
The answer is to start your trading career slowly, to enable you to build confidence, experience, and skill while assessing your risk profile. You do this by first establishing a long-term share portfolio, which concentrates on blue chip stocks.
The three portfolios of billionaire traders are outlined in this volume.
What I can reiterate in this section is that the first goal is to look at why you would be negative in aspects of trading. As a trader, you need to be positive, but always have a healthy and realistic respect for the market. Some experts suggest that you only have to stop reading negative media stories to build a positive attitude.
I believe that this is—in a world where you can make money in a bull or bear market—insufficient and actually sets a dangerous precedent. The aim is to actually see negative events as a positive trading opportunity. Look at the various needs around the world and ask yourself: “who will benefit from such an event?”
While many of the older professional traders will see the above as a complete waste of time, newer market players in the field of futures will tell you that trading equities does help you to improve your trading results. Don’t try to trade futures without skill, knowledge, trading savvy and, of course, the ability to trade with confidence and positive thoughts.
Yet another obvious statement to make is to stay away from people who are trading as a hobby. You want to associate with professional traders. After all, it is through such associations that you will develop necessary skills to build confidence and trading skills. I have a wide cycle of colleagues in the market, who exchange trading ideas and debate new issues.
This does not mean joining website chat rooms, where people are creating or promoting rumors. Get to know true and successful professionals.
As an analyst and trader, therefore, I am constantly on the lookout for trading ideas that will make me think and possibly rethink personal strategies.
There are many groups around the world that enable you to discuss market and company-related issues. I reiterate—look for professional business associations. These will be made up of analysts and traders who are making a living as traders.
Establish a Routine
• Start the day with a lengthy fast walk; at least 30 minutes. Remember that you will be sitting in front of a computer for hours a day—so start the day with an exercise that will keep you strong.
• Spend at least the first hour of the working day with administrative tasks. Get these out of the way as they become a distraction during the crucial trading hours. Some traders prefer to end the day by completing admin tasks.
• Have a designated strategy for the day.
• Set entry and exit points before the market opens.
• Research the financials of companies you wish to trade.
• Check the profile of world market indices for the past 24 hours.
• Determine the financial commitment you wish to make in each trade.
• Determine how much time you intend to invest in your trading day.
For some traders this might be a few hours a day or even a week.
• It is important to keep a record of all trading transactions in a journal.
Trading Plan Sections
A solid trading plan should have well-defined plans and strategies:
• Trading objectives and goals: What is your trading objective for the day and how does this apply to the overall trading strategy? For instance, how many trades do you intend to do each day and how much will you spend on each trade?
• Trading program: Do you have a tactic to improve your trading ratio of profits over losses.
• Defined trading plan: A professional trader will always clearly define the point at which he or she will buy a security and also the point at which he or she will sell that security.
Entry method: Based on market conditions, such an entry point may be on the down or upside.
• Examples:
If ABC Limited’s share falls by 15 percent off its current high, I will buy $10,000 worth of stock.
If ABC Limited’s share breaks the resistance level twice, I enter the position if the moving average confirms the buy.
I will always only buy if the position is supported by significant volume.
Exit method: Always choose a trailing stop loss and clearly define the sell point.
I will sell my entire position when the share has climbed by more than 30 percent.
I will sell my entire position if the share falls below the second stop loss.
The exit will always be just under the support of the first hour range.
If a trader is making continuous losses, there is something wrong with his or her strategy. Continuing to trade under such conditions is suicidal. Stop trading and review your strategies before you resume any form of trading.
• Examples:
If you make three losses in a row, stop trading.
• Stop trading immediately if losses account for 50 percent of your portfolio value.
If the above happens, many traders decide to stop trading for at least a week, while they reevaluate their strategies and trading techniques. In addition, check out and conduct more analysis on the market and trading conditions and risk management.
Finally, what about you?
If trading is a business, then you have to have a section of the business plan that covers salaries.
Ask yourself: What do you need to cover your expenses? If trading doesn’t meet your expectations, maybe you should review your trading objectives or stay in your current career.
One suggestion is to have a six month money account buffer that is six months of salary in place to cover your expenses.
For instance, if you need $10,000 a month to live on, ensure that you have $60,000 in a money market account from which you can draw on at ease. This doesn’t mean that you can draw for holidays if you achieve your $10,000 at the end of the month.
This is how it should logically work:
• The funds are there to provide you with confidence that you have that salary in place.
• That will provide you with the ability to trade on knowledge and skill and not on rumor—chasing the market because you need to make up that specific salary.
• Therefore, if your month’s trading equals $7,000, draw the required $3,000 to make up your salary.
• If your trading equals $13,000, place the additional $3,000 in the money market account, thus keeping or lengthening the period of funds you have in your account.
• Remember that in Year 2, your six month’s salary should increase to take into account inflation and improved living standards.
• This system is basic, but it does provide traders with a means to take cognizance of their monthly requirements and focuses on becoming a professional trader, being serious about this new career.
Chapter 11 sets out the basics of fundamentals.