Developing a winning trading system that fits you

Trading System that Fits You.
Gain all the benefits from Dr. Van Tharp's years of modeling traders and his research on how profitable trading systems are developed. His conclusion from this research is that average person doesn't have a chance at profitable trading because he or she concentrates on all of the wrong things.
This program helps you determine what type of trading system will suit you personally and how to create it. Learn little-known, closely-guarded secrets that are not published in books and that you’re not likely to find unless you accidentally stumble upon them.
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This program has 20 audio CDs: 11 CDs of newer material and 9 CDs from the classic home study course covering information no longer taught in our Systems Development workshop.
Many of our clients listen to these CDs over and over and over again just to get all the subtle details they sometimes miss on the earlier reviews.
The home study course also includes a comprehensive 340+ page manual that acts as a guide, a workbook and an instructor through your system building journey.
To familiarize you with the psychological pitfalls of system development. At the very least, it’s critical that you understand that you only trade your beliefs about the market, not the market itself.
To help you understand the key concepts and steps in system development, including expectancy, R-multiples, system quality and position sizing strategies.
Trend following, especially trends based upon fundamentals. Band trading. Value trading where value is defined as buying things at pennies on the dollar. Mental scenario trading. Seasonal tendencies when these are "real" and not statistical abnormalities. Spread trading and arbitrage.
To help you define "R" in your trading and develop appropriate setups, entry, and a stop loss.
Are you a low-risk investor who just wants to make small, consistent profits each month with only an occasional loss? Learn how to develop a system that will allow you to develop a unique methodology that will give you that kind of consistency!
Developing Sound Objectives.
This is the most important task of system development. If you do this one task properly, it will take at least half of your time during the development process. When you learn what it is, you’ll say, “Of course it’s important! ” but you’ll still probably spend very little time on it. To develop a system that fits you, you need to really think about what you want. It’s not a trivial task.
Most people ignore six or seven of the key components of system development when they do their research. In fact, you’ll never see a book on system development that covers more than six of them. That’s the limitation the average trader has in doing research. You want big profits with as little risk as possible, so you want every advantage possible when you start to develop such a system.
Most people concentrate on entry—the least important element in system development. And they ignore position sizing strategies—the most important element. Through this home study course you will learn position sizing algorithms that peak performers use. In addition, you’ll learn position sizing algorithms that will help you lower your overall risk, while at the same time, helping you achieve more consistent performance.
If you concentrate on these three secrets—which 95 percent of all traders and investors totally ignore—you can vault yourself into a class that only a few have been able to achieve.
1 - Get specific ideas for making better market entry and exit decisions.
2 - Learn specific position sizing ideas from the author of the Definitive Guide to Position Sizing .
3 - Be introduced to the psychological pitfalls that hold back so many people. Just knowing about them will help you avoid them.
4 - Work through Dr. Tharp’s model of how to design, develop, and customize a trading system.
5 - Learn new approaches to the markets and new techniques for analyzing them.
There are 15 concepts behind most trading systems. Most concepts, even the most popular ones, are meaningless. But you’ll learn about ones that work best.
6 - Receive practical trading ideas.
7 - Be introduced to a random-entry trading that earns between 0.5 percent and 11 percent per year on various historical tests.
8 - Better understand how expectancy is shaped by your exits from the market.
9 - Use the System Quality Number score to compare day trading systems in one market to long-term investing systems in another.
10 - Fifty percent of system development is designing sound objectives. You’ll hear ideas on how to develop sound trading objectives.
Imagine being in a room full of professional traders and investors. Each of them controls at least $5,000,000 in trading funds. Some of them control over a billion dollars. And these top traders and investors are gathered together to help you develop the perfect trading system for you!
“If one person can achieve great success, then that skill can be taught to others—in fact, to almost anyone. I’ve proven this formula in helping to develop top traders and investors. Now, I want to offer you the same incredible opportunity to make big money. ”—Van K. Tharp Ph. D.
Are you willing to roll up your sleeves and work at designing objectives and risk parameters for yourself? If you are, and you’re willing to apply the principles we teach you, you’ll love this home study.
Below are some common questions we received about this home study:
Q: I am interested in this home study because I want to calculate the SQN of my systems. Will this course give me information on SQN?
If you want to understand the System Quality Number TM (SQN TM ), please consider reading the Definitive Guide to Position Sizing Strategies or attending either the Blueprint Workshop or the Systems Development Workshop. Our systems home study course has little information on SQN related topics compared to the extensive information you will find in the Definitive Guide book and the Blueprint or Systems workshops. We will soon release a home study course focusing soley on SQN.
Q: I want to understand how to backtest my system. Does this course address backtesting and if so are there recommendations on software that does that well?
Dr. Tharp places little value for traditional back testing methods as promoted by platform vendors. Instead, he prefers that traders work on understanding all of their beliefs relating to a trading system - why a system should work and how it should perform in various market types. The more you understand about your trading system, the less testing you will need to do. In addition, the best “testing” results come from live trading with very small positions. There are so many assumptions and logic rules built into backtesting software systems that often, live trading results differ quite significantly from backtests – even with the best in data, assumptions, logic, and software.
Q: I want to follow Van’s suggestion and develop systems that fit particular market type. I don't fully understand how to gauge market type. Does this course cover that?
There is some information on market types in this home study course but it is minor compared to the live workshop. In the How to Develop Systems Workshop, we spend significant time on market types and considering what types of systems work well in each market type.
You will have one full year to develop your system and apply the principles taught. At the end of the year, if you are not satisfied that the information has improved your trading, send back your audio program, along with the system(s) you developed and a journal showing your trades, and your objectives. If you have followed the steps and are still not satisfied, we will refund the full price of your audio program. All we ask is that you follow the model and do the work.
“Your system workshop simply changed the way I approach system development… my profits are significantly higher and could have paid my workshop costs ten times since then. ”—L. M., Atlanta, GA.
“Superb. Every section of the workshop was stuffed with information. I couldn’t take notes fast enough (so I opted to just listen). Lots of creative ideas worthy of further research”—R. W., Superior, CO.
“Due to attending your workshop entitled How to Develop a Winning Trading System that Fits You, I have had a radical shift in my perception of how to achieve consistently successful trading. ”—M. S., Shropshire, England.
“Excellent! I never thought of how many separate elements went into a system. I now have the knowledge and confidence to develop a system for myself. ”—B. F., Huntington Station, NY.
“Very useful to see first hand the real risks of ruin, over-trading, etc. The workshop was very helpful to me in laying out the specific tasks I must complete. ”—B. C., Toronto, Ontario, Canada.
“Having been to all of Van’s workshops on system development, this one was a repeat for me. However, I still gained a great deal from the workshop -- the creative money management strategies section was especially thought provoking. This workshop is a must for any trader, beginner or experienced. Well done Van. ”—K. T., London, England.
Van Tharp, Van Tharp Institute, Van TharpeLearning, Position Sizing, and IITM are trademarks of IITM, Inc in the United States and elsewhere.
SQN is a federally registered trademark of IITM, Inc.

Developing a winning trading system that fits you

Experiential learning within a group dynamic is unbeatable training!
"I've proven this formula to help develop top traders and investors.
Now, I want to offer you the same incredible opportunity to.
make big money and I'll take all the initial risk."
—Van K Tharp, PhD.
Winning Trading Systems.
3-Day Systems Development Workshop.
Presented by R. J. Hixson and Van Tharp.
If you want consistency and would like to make profits from the market, you'll want to attend this three-day workshop. We'll show you little-known, closely guarded secrets that you're not likely to find unless you accidentally stumble upon them yourself.
There are hundreds, if not thousands, of trading systems that work. But most people, after purchasing a preexisting system, will not follow the system and trade it exactly as it was intended. Why not? Because the system doesn't fit them or their style of trading.
If you concentrate on these three secrets, which 95% of all traders and investors totally ignore, then you can vault yourself into a class that only a few have been able to achieve.
1. You must concentrate on the most important task of system development. If you do it properly, it will take at least half of your time during the development process. When you learn what it is, you'll say, "Of course, it's important," but you'll still probably spend very little time on it.
Your objective is your goal, your target. It is the things that you want your system to accomplish.
"I have to tell you how thrilled and excited I am about the systems course I was recently certified in. I believe that course was designed especially for me, I got so much out of it. You did a great job presenting the course material. You were fabulous, amazing, energetic and your enthusiasm was contagious! I also appreciate your personal availability between the scheduled meetings. It was an extra bonus to have some one on one conversations specifically about my trading system, testing methodology and personal coaching on how to overcome our problems with actually trading our system.
"Of course, I must give some credit to my fellow attendees. They were great, and played all out, further enhancing the value of the course. But without your expert facilitation to encourage more participation it would not have occurred in the way that it did.
"Since I left North Carolina, I have had an opportunity to spend a week with my client to re-create what I learned in the course. We got down and listed our core beliefs, our objectives, and looked long and hard at our biases. From this information we designed an entry, exit and simple position sizing strategy that fit our objectives. Actually, we have a working system and it turns out that just a little modification to that existing system is what we really want to meet our objectives. Now I'm all excited, I can hardly sleep, because Chuck handed me the tools and methodology I needed to effectively verify and back test this new system. I just need to type faster to keep up with my enthusiasm." —B. Cupps.
2. A good trading system has 10 key components. Most people ignore six or seven of them when they do their research. In fact, you'll rarely see a book on systems development that covers more than six of them. That's the limitation the average trader has in doing research. You want big profits with as little risk as possible, so you want every advantage possible when you start to develop such a system.
3. Most people concentrate on the least important element in trading system design—entry. They also ignore the most important element—position sizing strategies. At the How to Develop A Winning Trading System That Fits You Workshop , you'll learn at least three types of position sizing systems that will help you lower your overall risk, while at the same time, helping you achieve more consistent performance.
You'll learn exactly how one trader turned $10,000 into $1.1 million in less than a year. In addition, we'll also show you how a group of traders have taken over $100 million out of the market over the last 10 years! Learn the advantages and disadvantages of both these styles.
1. You'll get specific ideas for making better market entry and exit decisions. You'll also get specific position sizing principles. Your workshop notebook will contain lots of information you'll want to review over and over again.
In March 2005, I attended his first course that he hosted in London on System Development. I was just starting up trading and was steadily losing money as were the three others in my group. We four were quite new to trading whilst everyone seemed to be professional traders. I still trade and sometimes wonder what would have happened if I hadn’t attended that course? Did it make me an instantly successful trader? No - of course not, but what it did do was to almost instantly stop me being a losing trader and that was a part of the battle won because it meant I could continue to work on my trading knowledge without having sleepless nights. Prior to that course I really was waking up sweating wondering what I was getting myself into. I don’t have that problem any longer though I don’t mind admitting that I do lie in bed sometimes thinking whether I was a bit hasty in putting on a trade. When Dr. Tharp talked about the psychology of trading, I didn’t really fully appreciate it at the time but I do now. —M. Campling.
Dr. Tharp discovered certain little-known secrets about doing research that you need to know if you want to develop an effective system that's right for you!
Dr. Van K. Tharp is a trader, author, modeler of peak performance results, and most importantly, a peak performance coach willing to help you make more money and lead a more effective life. He's collected psychological profiles from over 4,000 traders and investors. He's personally interviewed hundreds of top people in the field to determine what makes them excel and how they make immense profits.
"This class really provided the mechanics and practical methods of how to create a workable system."—G. Kapraun.
"Our team had a great experience in learning how important it is to lock in large R-multiple profits. This was a great lesson wit real-world applications."—Rick Freeman.
"Intense and very challenging. Good structure and focus."—Jordi Llobet Serra.
"A very valuable experience that drove home the importance of knowing risks, expectancy, position sizing and profit protection!"—Roman Franko.
"Excellent! Even better than the first time I took it 8 years ago. No one does it better. Best information for real world system development and trading (giving us the best tools/equipment)."—Robert De Boer.
"I feel energized. Trading game has shown me for the first time what happens to other traders as they trade, what emotions and thought processes they go through. As a results, I am no longer scared of 'them''[those] who are on the opposite side of my trades."—L. Valls.
"Incredible weekend! I was a 'kid in a candy store' with so many like-minded people committed to trading and personal excellence."—Warren Beam.
"The course exceeded my expectations. It was very worthwhile. It put into perspective the steps required to design a workable system. Sessions on exits, entries and money management were particularly interesting for me. I made some new friends that I will stay in contact with. I received excellent value for my time and money."—Mike McMinn.
"Excellent! I wish I had taken this course before I started trading. The instructors have shown me lots of practical ideas to take home."—Pat Fong.
"I was very pleased. As a novice investor/trader this course did an excellent job of laying out the pieces of the trading puzzle."—C. D., Indiana.
"Well thought out and well presented. Tremendously informative. IITM presenters have only the best interests of their audience at heart. This is plainly evident in their enthusiasm, willingness to share and competence."—R. F., New York.
"Excellent. Games really honed in for me the importance of objectives and how they drive my trading system development and that there are really several types of systems needed (trading, accounting, etc)."—D. H., Ohio.
"Very useful and quite enlightening due to the emphasis on goals and objectives, which work as a great filter on making decisions."—D. M., South Africa.
"Many intricate complications became defined and simplistic."—T. S., Bahamas.
"I feel like I'm going home with bags of gold! It's a goldmine of information."—B. C., Utah.
"Superb. Every section of the seminar was stuffed with information. I couldn't take notes fast enough (so I opted to just listen). Lots of creative ideas worthy of further research"—R. W., Colorado.
"Super. The cost of the seminar was nothing in comparison to the value received."—J. D. Georgia.
"Excellent! I never thought of how many separate elements went into a system. I now have the knowledge and confidence to develop a system for myself."—B. F., New York.
"Very useful to see first hand the real risks of ruin, over-trading, etc. The seminar was very helpful to me in laying out the specific tasks I must complete."—B. C., Ontario, Canada.
"It was the most practical and best seminar I've attended in the last 10 years. Enjoyable too . . ."—W. R., Illinois.
"The seminar helped me put things in perspective. I came away very satisfied. I have a new calm, yet resolve to improve my trading, and the confidence to know I can."—J. A., Illinois.
"This helped me to understand the proper steps to take in my system development. I thought it was a good balance between the technical (Chuck) and the theory (Van)."—A. C. Florida.
"Overall I found the seminar to be on the cutting edge of trading psychology and system development."—L. M., Louisiana.
"Hugely informative, it has everything from the necessary basics to the very complex."—Tania Northey, Australia.
"I believe it easily has the best (most valuable) content of any course I have done."—Peter Deck, Australia.
"Gave us what we could not achieve by reading books."—David Sanders, Australia.
"Excellent. Very productive and stimulating. Worth traveling a long way for."—Richard Luke, Australia.
"Very good. Gave me a thorough grounding and many new ideas."—David Blissett, UK.
"It was just what I needed to help me understand the comprehensive nature of a systems (it isn't just entry and exit procedure). I can use my creativity and enjoy the process of developing my strategy. I learned to dig in a try something."—Craig Jorgensen, MI.
"Any trader who does not participate in this course has already made a major trading mistake. The principles of a successful trading plan are very rarely, if ever, explained fully except by Van Tharp."—S. Redgrave, Australia.
Are you willing to roll up your sleeves and work at designing objectives and risk parameters for yourself? If you are, and you're willing to apply the principles we teach you, then you'll love this workshop. You'll leave with the keys to a system that's just right for you!
When we absorb all of the initial risk, you'll be more likely to come. Our objective is to really help you. As a result, Dr. Tharp is willing to make it very easy for you to attend.
Dr. Tharp has done the hard part for you!
The research has already been done for you. Think how much time, energy, and money you can save by coming to this workshop. You'll focus on the more important aspects of trading system development and Dr. Tharp's model. Most of you will probably save tens of thousands of dollars—certainly many times the cost of the workshop.
Q: I trade the stock market exclusively, will this workshop cover stock trading?
It's designed around systems not markets. We estimate that in the past, at least half of the attendees are stock market traders. However, our goal is to help you design a system that fits you, no matter what market you trade.
Q: I am a short-term day trader. My friend recommended this workshop to me but he would be classified as a long-term investor. How can one workshop meet the needs of our very different trading styles?
We discuss the parts of a system in detail and most of those parts remain the same no matter what your style of trading may be. We then group you with other like-minded traders to work on system design. Thus, if you are a day trader, you'll be with other short-term traders. If you are a long-term trader, you'll be with other long-term traders. Over the years, we've found that this method works very well and everyone gets what they are looking for.
Q: I don't know much about systems and research. Will I be lost?
Although the information we present is very advanced, we will present it in such a way that anyone can understand it. We strongly recommend reading Dr. Tharp's book Trade Your Way to Financial Freedom and The Definitive Guide to Position Sizing - both are excellent reads and provide resourceful information prior to the course.
People who want to make trading or investing more consistent and profitable:
These are the type of individuals who have come (literally from all over the world) to attend our workshops. Imagine the synergy of results one could realize from the networking, ideas, and experience at this workshop.
Q: Can I talk to prior attendees before I make my final decision?
Yes. We'd be happy to let you talk with people who have attended in the past. They'll tell you our workshops are of the highest quality and packed with information. Our attendees tell us our workshops have transformed their lives and increased their profits.
"Words fail me—perhaps second-to-none. A must for any novice and master trader alike!" —B. M., S. Africa.
"It was an outstanding event and most educational. My goal is to become a world-class trader and I know with your guidance that reality is inevitable." —V. B., TX.
System Development Articles:
What Can we Expect from a Trading System? Exits - Are Your Stops Too Large or Too Small? System Performance, Part One, Part Two, Part Three, Part Four Don't Take Just Any Ol' Entry.
Van Tharp, Van Tharp Institute, Van TharpeLearning, Position Sizing, and IITM are trademarks of IITM, Inc in the United States and elsewhere.
SQN is a federally registered trademark of IITM, Inc.

How to develop a trading system. How to Develop A Winning Trading System That Fits You Home Study. system development. Gain all the benefits from Dr. Van Tharp's years of modeling traders and his research on how profitable trading systems are developed. His conclusion from this research is that average.
How to develop robust trading systems.
How to develop a trading system. How to Develop a Complete Trading System. Trading stocks using a system you develop yourself helps you succeed as a trader. A complete stock trading system has five basic parts or components. These components can be developed in step-like.
When it comes to trading systems, everyone seems to be looking for the "holy grail. There are hundreds, if not thousands, of trading systems that work, but most people, after purchasing a system, will not follow its rules or trade it exactly as it was intended.
When I first entered the business of coaching traders, most people thought that a trading system was an indicator. Every trader needs a strategy or system to form a framework for their trading. Without a repeatable way to identify and execute trades, you can never be a consistent performer. Basically, your system is a roadmap that guides your trading and keeps you from making decisions when you are least able to do so.
Trading can be stressful. It's easy to get distracted. Life goes on regardless of what the market is doing. If you hear news about the market changing, or you're running late for your next appointment, you are not likely to make good decisions about your trades. But you can't trade just any system. There are hundreds, if not thousands, of trading systems that work, but after purchasing one, the typical trader will not follow it or trade it exactly as it was intended.
One of the biggest secrets of successful trading is finding a trading system that fits you personally. Developing your own system allows compatibility with your own beliefs, objectives, personality, and edges. You might be thinking, "why should I develop my own system? Most system development software is designed because people want to know the perfect answer to the markets. They want to be able to predict the markets perfectly. You can buy software now for a few hundred dollars that will allow you to overlay numerous studies over past market data.
Within a few minutes, you can begin to think that the markets are perfectly predictable�a dangerous belief that will stay with you until you attempt to trade the real market instead of the historically optimized market. Many trading accounts have ended up plummeting because of this very thinking. And what if the person peddling the system is just a great marketer who makes money from selling systems instead of actual trading?
How would you know? The idea that you need computer or math skills to develop your own system is one of the biggest misconceptions out there. Even if you find computers, math or anything mechanical terrifying, you can still determine how and what you want to trade, which is the basis behind developing your own system.
Just remember that not all trading systems even have to be computerized in the first place! In fact, people have designed and tested successful trading systems for years by hand. Computers make things quicker, faster and more efficient, but they aren't absolutely necessary unless you find that you have to use one in order to feel confident about your trading if you disagree with this assertion, you probably DO need computer testing to feel comfortable; perhaps you believe that when a computer generates numbers, it is more accurate.
If you truly understand what a trading system really is, this will all make sense. So What is a Trading System? What most people think of as a trading system, Van would call a trading strategy that consists of seven parts:. The set-up conditions amount to your screening criteria. For example, if you trade stocks, there are 7,plus stocks that you might decide to invest in at any time. Most people employ a series of screening criteria to reduce that number down to 50 stocks or less.
There are all sorts of signals that can be used for entry, but they typically involve some sort of move in direction that occurs after a particular set-up occurs. The protective stop is the worst-case loss you would want to experience. Your stop might be some value that will keep you in the trade for a long time i. Protective stops are absolutely essential. You need stops to protect yourself. Quite often, when you get stopped out of a position, the stock will turn around in the direction that favors your old position.
When this happens, you might have a perfect chance for profits that was not covered by your original set-up and entry conditions. Consequently, you need to think about re-entry criteria. The exit strategy could be very simple. It is one factor in your trading over which you have total control.
Your exits control whether or not you make money in the market or have small losses. You should spend a great deal of time and thought on your exit strategies, for one very good reason: Far too many people focus only on market entry, or what to buy, rather than on when to sell. If you approach trading with an exit strategy, it will benefit you right away.
Position sizing is that part of your system that controls how much you trade. It is through position sizing that you will meet your objectives. Finally, you need multiple trading systems for each type of market. At minimum, you might need one system for trending markets and another system for flat markets.
Many professional traders have multiple systems that operate in multiple time frames over many markets to help offset the enormous portfolio dependence of a single trend-following system. Your system should reflect your beliefs i.
What's more, most people have never really taken the time to think through what they truly want from their trading in the first place. No system is a money-making machine that can be turned on and print cash forever. Systems must be evaluated and revised to adapt to changing market conditions. Improving your trading performance will not come from some indicator that better predicts the market. It comes from learning the art of trading and understanding how to create a trading system that fits your wants, needs, desires and lifestyle.
A great trader asked me once what I wanted my system to do, and I responded vaguely about outperforming the market. He pushed me for the performance statistics I was after, and I told him what they were, but I said that I needed to see what the system would do first. He basically told me that I had it backwards. He said very specifically to start with the performance I was expecting and design a system to that specification.
Gain all the benefits from Dr. Van Tharp's years of modeling traders and his research on how profitable trading systems are developed. His conclusion from this research is that average person doesn't have a chance at profitable trading because he or she concentrates on all of the wrong things.
This program helps you determine what type of trading system will suit you personally and how to create it. This program has 20 audio CDs: Perfectionism, gambling, unnecessary losses, not being able to pull the trigger�.
These are just some of the issues that traders contend with in the markets every day. What causes us to think this way and how can we learn to become better and more profitable traders?
Poor position sizing is the reason behind almost every instance of account blowouts �read more. One of the real secrets of trading success is to think in terms of risk-to-reward ratios every time you take a trade. And is the potential reward worth the potential risk?
The market does not owe you or anyone great riches. The market does, however, occasionally tease a large number of people with seemingly easy gains during bubbles and other manias only to take them away again. If you are serious about being a good trader, then you need to approach the practice of trading with the same level of rigor with which you would approach any high level endeavor �read more.
If you are not already a subscriber, consider subscribing to Van Tharp's weekly . Each week you will get informative articles, trading tips, and a monthly update on market-type conditions. Also, you'll get the most recent ideas from Van before anyone else! There is no charge and we do not share your information.
What is a Trading System? System Development When I first entered the business of coaching traders, most people thought that a trading system was an indicator. Tharp There are folks out there who are obsessed with: Finding the stock that will make them a fortune, as though there is some magic way one can actually do that.
Developing a trading system to the point of perfection, without ever getting around to actually trading. Do you relate to any of these examples? What most people think of as a trading system, Van would call a trading strategy that consists of seven parts: A worst-case stop loss.
A position sizing algorithm. Multiple systems for different market conditions if needed. Examples of possible objectives: I want to spend less than three hours a week on trading and get the maximum yield out of my system.
Psychology of Trading Perfectionism, gambling, unnecessary losses, not being able to pull the trigger�. Poor position sizing is the reason behind almost every instance of account blowouts �read more Expectancy One of the real secrets of trading success is to think in terms of risk-to-reward ratios every time you take a trade.
If you are serious about being a good trader, then you need to approach the practice of trading with the same level of rigor with which you would approach any high level endeavor �read more If you are not already a subscriber, consider subscribing to Van Tharp's weekly . Back to the Top. A good resource to learn more about this topic: View Our Site Map.

10 Steps To Building A Winning Trading Plan.
There is an old saying in business: "Fail to plan and you plan to fail." It may sound glib, but those who are serious about being successful, including traders, should follow these eight words as if they were written in stone. Ask any trader who makes money on a consistent basis and they will tell you, "You have two choices: you can either methodically follow a written plan, or fail."
If you have a written trading or investment plan, congratulations! You are in the minority. While it is still no absolute guarantee of success, you have eliminated one major roadblock. If your plan uses flawed techniques or lacks preparation, your success won't come immediately, but at least you are in a position to chart and modify your course. By documenting the process, you learn what works and how to avoid repeating costly mistakes.
Whether or not you have a plan now, here are some ideas to help with the process.
[Building a trading plan is one of the most important aspects of successful day trading. In over five hours of on-demand video, exercises, and interactive content, Investopedia's Become a Day Trader Course will show you a proven strategy that consists of six trades that are applicable in any security and any market.]
Disaster Avoidance 101.
Trading is a business, so you have to treat it as such if you want to succeed. Reading some books, buying a charting program, opening a brokerage account and starting to trade are not a business plan - it is a recipe for disaster. (See also: Investing 101)
Once a trader knows where the market has the potential to pause or reverse, they must then determine which one it will be and act accordingly. A plan should be written in stone while you are trading, but subject to re-evaluation once the market has closed. It changes with market conditions and adjusts as the trader's skill level improves. Each trader should write their own plan, taking into account personal trading styles and goals. Using someone else's plan does not reflect your trading characteristics. (See also: Fibonacci And The Golden Ratio )
Building the Perfect Master Plan.
What are the components of a good trading plan? Here are 10 essentials that every plan should include:
1. Skill Assessment.
Are you ready to trade? Have you tested your system by paper trading it and do you have confidence that it works? Can you follow your signals without hesitation? Trading in the markets is a battle of give and take. The real pros are prepared and they take their profits from the rest of the crowd who, lacking a plan, give their money away through costly mistakes.
2. Mental Preparation.
How do you feel? Did you get a good night's sleep? Do you feel up to the challenge ahead? If you are not emotionally and psychologically ready to do battle in the markets, it is better to take the day off - otherwise, you risk losing your shirt. This is guaranteed to happen if you are angry, preoccupied or otherwise distracted from the task at hand. Many traders have a market mantra they repeat before the day begins to get them ready. Create one that puts you in the trading zone.
3. Set Risk Level.
How much of your portfolio should you risk on any one trade? It can range anywhere from around 1% to as much as 5% of your portfolio on a given trading day. That means if you lose that amount at any point in the day, you get out and stay out. This will depend on your trading style and risk tolerance. Better to keep powder dry to fight another day if things aren't going your way. (See also: What is your risk tolerance?)
4. Set Goals.
Before you enter a trade, set realistic profit targets and risk/reward ratios. What is the minimum risk/reward you will accept? Many traders will not take a trade unless the potential profit is at least three times greater than the risk. For example, if your stop loss is a dollar loss per share, your goal should be a $3 profit. Set weekly, monthly and annual profit goals in dollars or as a percentage of your portfolio, and re-assess them regularly. (See also: Calculating Risk And Reward )
5. Do Your Homework.
Before the market opens, what is going on around the world? Are overseas markets up or down? Are index futures such as the S&P 500 or Nasdaq 100 exchange-traded funds up or down in pre-market? Index futures are a good way of gauging market mood before the market opens. What economic or earnings data is due out and when? Post a list on the wall in front of you and decide whether you want to trade ahead of an important economic report. For most traders, it is better to wait until the report is released than take unnecessary risk. Pros trade based on probabilities. They don't gamble.
6. Trade Preparation.
Whatever trading system and program you use, label major and minor support and resistance levels, set alerts for entry and exit signals and make sure all signals can be easily seen or detected with a clear visual or auditory signal. Your trading area should not offer distractions. Remember, this is a business, and distractions can be costly.
7. Set Exit Rules.
Most traders make the mistake of concentrating 90% or more of their efforts in looking for buy signals, but pay very little attention to when and where to exit. Many traders cannot sell if they are down because they don't want to take a loss. Get over it or you will not make it as a trader. If your stop gets hit, it means you were wrong. Don't take it personally. Professional traders lose more trades than they win, but by managing money and limiting losses, they still end up making profits.
Before you enter a trade, you should know where your exits are. There are at least two for every trade. First, what is your stop loss if the trade goes against you? It must be written down. Mental stops don't count. Second, each trade should have a profit target. Once you get there, sell a portion of your position and you can move your stop loss on the rest of your position to break even if you wish. As discussed above, never risk more than a set percentage of your portfolio on any trade.
8. Set Entry Rules.
This comes after the tips for exit rules for a reason: exits are far more important than entries. A typical entry rule could be worded like this: "If signal A fires and there is a minimum target at least three times as great as my stop loss and we are at support, then buy X contracts or shares here." Your system should be complicated enough to be effective, but simple enough to facilitate snap decisions. If you have 20 conditions that must be met and many are subjective, you will find it difficult if not impossible to actually make trades. Computers often make better traders than people, which may explain why nearly 50% of all trades that now occur on the New York Stock Exchange are computer-program generated. Computers don't have to think or feel good to make a trade. If conditions are met, they enter. When the trade goes the wrong way or hits a profit target, they exit. They don't get angry at the market or feel invincible after making a few good trades. Each decision is based on probabilities. (See also: The NYSE And Nasdaq: How They Work )
9. Keep Excellent Records.
All good traders are also good record keepers. If they win a trade, they want to know exactly why and how. More importantly, they want to know the same when they lose, so they don't repeat unnecessary mistakes. Write down details such as targets, the entry and exit of each trade, the time, support and resistance levels, daily opening range, market open and close for the day and record comments about why you made the trade and lessons learned. Also, you should save your trading records so that you can go back and analyze the profit or loss for a particular system, draw-downs (which are amounts lost per trade using a trading system), average time per trade (which is necessary to calculate trade efficiency) and other important factors, and also compare them to a buy-and-hold strategy. Remember, this is a business and you are the accountant.
10. Perform a Post-Mortem.
After each trading day, adding up the profit or loss is secondary to knowing the why and how. Write down your conclusions in your trading journal so that you can reference them again later.
The Bottom Line.
Successful paper trading does not guarantee that you will have success when you begin trading real money and emotions come into play. But successful paper trading does give the trader confidence that the system they are going to use actually works. Deciding on a system is less important than gaining enough skill so that you are able to make trades without second guessing or doubting the decision.
There is no way to guarantee that a trade will make money. The trader's chances are based on their skill and system of winning and losing. There is no such thing as winning without losing. Professional traders know before they enter a trade that the odds are in their favor or they wouldn't be there. By letting their profits ride and cutting losses short, a trader may lose some battles, but they will win the war. Most traders and investors do the opposite, which is why they never make money.
Traders who win consistently treat trading as a business. While it's not a guarantee that you will make money, having a plan is crucial if you want to become consistently successful and survive in the trading game.