Dear Reader,
Last Thursday, we talked about the sacrifices you must make to become a successful trader – time and money.
Trading is about having the right mindset. Can you put aside your emotions and do the best thing for your money – even when you “feel” like doing something else?
The questions we talked about last week all boil down to one thing: Do you have what it takes to be a trader?
And if the answer is yes, then it’s time to start building your trading plan…
Let’s get started.
Finding YOUR Market
Just today, I got a survey postcard for a popular trading magazine, and one of the questions it asked is what markets I currently trade – securities, futures, commodities, options, forex, derivatives, etc.
I have seen and heard a lot of people say something like, “I trade everything” or even worse: “I trade whatever is profitable.”
I hate to break it to you, but there is no such thing as “everything” and “profitable” in the same sentence.
That’s like working at a grocery store and being the clerk, stock boy, butcher, bakery person, cashier, and manager all at the same time. You’ll run yourself ragged and not make a dime on anything.
So you need to choose which markets you’ll want to participate in…
The stock market is good if have a lot of money, but not a lot of time…
The option market is good if you have a lot of time, but not a lot of money…
The currency and cryptocurrency markets are great if you have a full-time job or keep strange hours, as those asset classes trade globally, 24 hours a day.
I could go on, but you get the idea. You have to find YOUR market, the one that’s going to work for both your time and your money.
Here at Gulfport Analytics, we keep it to stocks, options, and crypto. No bonds, no futures, nothing complex or risky.
Bottom line, don’t become a jack of all markets, get good at one or two markets, and be a master.
Once you figure out which market you want to trade, it’s time to get to the big stuff… but don’t worry – I’m going to boil it down to three simple steps, starting with…
Step 1: Your System
Whatever market you choose, you’re going to need a system. Being a rules-based trader means systematizing your trading so you always know when to trade, the right trade to make at any given time, and when to keep your powder dry.
Trading with a system means never having to wonder what to trade and when, or what to do in a given scenario because the system tells you exactly what to do. Over the years, I’ve developed dozens of systems to help me profit in the markets in all kinds of conditions – I recommend finding one that works for you.
Step 2: Your Risk/Money Management Plan
This is one of the most important things you’ll do as a trader. Creating your risk/money management plan involves only risking a certain percentage of your capital – your money – in your trading account per. I’m talking about not risking more than between 2% and 5% of your account per trade. This is critical because you want to make sure that you’re not risking too much on losing trades and making too little on winning trades. And you do this by keeping your risk per trade the same across all trading strategies.
So say, for example, you have a trading account with $25,000 available to trade options. When following the 2% rule, that means you’re able to open each trade for no more than $500. And if the trade doesn’t work out, you still have 98% of your account left for your next opportunity.
In fact, even if you lost 100% of what you paid per trade ($500) on the next five trades in a row, you’re looking at a $2,500 loss. Of course that might sting a bit at that time, but it’s still only a 10% loss in your account – instead of that entire $25,000.
Step 3: Your Trade Management Plan
involves using price and time targets to maximize your profits and minimize your losses. And the best way to do it is to establish these targets first. Your price target is the price you need the stock, exchange-traded fund (ETF), commodity, or whatever you’re trading to hit in order to capture profits.
Your time target is the time frame in which you need to hit your price target. You can set both of these targets easily by looking at a stock’s past price moves and patterns and eyeballing the time frames in which the price moves you need to happen.
One Last Thing
Once you have your trading plan ready to go, you might think your work is done.
You’d be wrong.
You wouldn’t believe how many traders fail even after making a rock-solid trading plan because they never reevaluate it.
The markets are constantly changing. Your life is constantly changing. So you need to remember to tweak your trading plan as you go.
This means constantly evaluating your business plan as the markets change. Perhaps you’ll add an additional system to the one you’re currently trading to smooth down your equity curves. In any case, markets (and people) change, so be ready to adapt and change your trading plan.
As a trader, this first step is the most important. Trading without a comprehensive plan is like trying to drive from New York to Los Angeles without a map. All you really know is you need to head west.
You would never take a journey like that without a map. And you should never trade without one, either.
This road map will tell you exactly how you plan on making your trading business grow – and the best way to realize the goals you’ve set for yourself.
If you’re following along, I would love to see the trading plan you’re putting together. And if you have any questions while you’re figuring it out, I’m here to help! Contact me and my team right here.
And if you already have one you’ve been working with, I’d love to see it. Drop me a note here.
Good trading,
Tom Gentile
America’s Pattern Trader