New Year, New Trading Plan: Ask Questions and Don't Skimp on the Answers!

by: John Carter

Before you begin online stock trading next year, devote a great deal of thought to the online stock trading plan. Here's one online stock trader's method of planning that will get you thinking.

[Editor's note: In this first-person article, author John Carter makes a case that every trader should write out a detailed -- and we do mean detailed -- trading plan. Carter shares actual questions from his own trading plan that he asks himself each year and goes on to answer them. Everyone's plan will be different, of course, but this is a good template for any trader to consider as the New Year rolls around.]

A two-foot long Arrowana is a voracious predator fish. A single-minded creature, it has one basic rule of thumb that it follows each and every day: If it thinks something will fit into its mouth, it will eat it.

When online stock trading traders visit my office to watch me trade, they often are surprised to learn that their first assignment is to feed Martha, my two-foot long pet Arrowana. They have to take the net, dip it into the feeder tank filled with goldfish and choose a victim. Martha is used to this routine by now and begins to shimmer with excitement and anticipation. The goldfish is released. The water boils and churns as the predator lunges, and a few seconds later all that remains of Nemo is a few scales and a bit of fin.

Steve Patrow, a visiting trader, sums it up when he remarks, "That just seems really cruel."

"Yep," I reply, "Almost as cruel as sending a trader out into the markets without a fully developed trading plan." A trader who is trying to make a living in the markets without a fully developed trading plan is in the exact same position as the goldfish. Whereas one is merely a meal for an Arrowana, the other is routinely preyed upon by professional online stock traders. At least with the goldfish, the pain is over quickly. Online stock traders without a plan can stretch out their torment for years.

Why It Matters In Online Stock Trading

My first online stock trading plan was created in 1993, eight years after I started online stock trading. It was a one-page document that has evolved over the years into the current 15-page plan that I use today. I update this report annually. My plan expanded as the following truths came to light:

• A superior per trade tracking system had to be set in place;
• A specific day-to-day money management system had to be set in place;
• A methodology of holding specific trading setups accountable for performance had to be set in place;
• A reward and punishment system for myself had to be set in place;
• My plan had to evolve and take into account the setups and markets that best fit my personality; and
• I had to incorporate not only trading into my plan, but my whole life, to really make it work.

Every trader I've worked with has mentioned that the comprehensive business plan I make them write has been the deciding factor in his own performance. "It was when I turned the corner," is a common phrase I've heard regarding the writing of such a detailed online stock trading plan.

So what's in the online stock trading plan?

I'm going to show you the exact questions I make myself answer every year and take you through them step by step. What follows are the questions and excerpts of the answers from my actual trading plan for 2005. Yours will be different, of course, but the structure will hold you in good stead.

Why Am I Online Stock Trading Again in 2005?

This is the first question I ask myself each year. Although this might seem obvious, it is important to deliberately choose this online stock trading occupation over everything else that's available out there. This is applicable not only to full-time online stock trading traders, but also to those who are trading part-time while holding down another job.

The main reason I'm going to continue online stock trading in 2005 is that I enjoy the financial independence and freedom that online stock trading has to offer. I also love the fact that I can do online stock trading from anywhere. I've never been good at taking orders, so I appreciate that I don't have a boss that has to be placated. I enjoy meeting other online stock trading traders, as they are the most random, eclectic and interesting people on the planet, and the mental challenge and stimulation of trading is tremendous-- if I stopped, I would miss online stock trading.

What Factors Going on in the Rest of My Life Might Affect My Online Stock Trading?

This is where I take stock of everything else that is going on in my life and how it might impact my online stock trading. By doing this, I have figured out when I needed to hire my first assistant, when I needed to bring on another partner, and whatever else needed to be done to streamline my life for online stock trading.

I have a lot of activities going on in my life besides online stock trading. I'm actively involved in real estate investing, coin collecting, traveling and have a lot of stuff going on with the website. My wife and I are starting to plan for a family and are looking at moving from Boston to Texas, where most of our family is located.

I know that online stock trading is my main occupation, and the only way to continue with these other things is if I'm making profits from my online stock trading. It is possible that I will drop some of these other activities if they become a distraction. I will compartmentalize and focus on online stock trading during trading hours. To help with this, I have someone who runs the day-to-day operations of the website and someone else who helps manage my other investments. I will look at modifying the newsletters I write to focus only on the short- term investments on which I am focused. Right now, I am still writing some portions of my newsletters that don't readily apply to my current trading. In reality, these newsletters are mostly for me. Writing the newsletters helps force me to clarify my own research and continue to find new online stock trading ideas.

I won't try online stock trading if I am traveling or on vacation. It's fine to have swing trades on and manage existing positions, as long as I have a stop and target in place and don't try to out-think the position intraday. If distractions are in the picture, I will not trade. Get rid of the distractions first, such as having uninvited guests over, morning phone calls, people instant messaging you in the morning asking about a trade and so forth. Ignore phone calls and instant messages until after 11:00 a.m. eastern time. Or better yet, turn them off. Don't be accommodating just to be nice. The path to hell is paved with good intentions.

What Markets Am I Going to Trade?

This is where I lay out all of the markets I'm going to trade. Beginning online stock trading traders should only be focusing on a few markets. Once a trader decides, he or she should stick with them for a year instead of always looking for the "next great thing."

For day trades, I'm going to trade the mini-sized Dow (YM), E-mini S&Ps (ES), E-mini Russell (ER), 30-year bonds (US) and the euro. For swing trades, E-mini Nasdaq (NQ), 10-year note (TY), corn (C), wheat (W), soybeans (S), crude oil (CL), gold (GC), silver (SI), single stock futures, individual stocks and stock options. I will allocate my total trading funds as follows:

• 25 percent intraday trades (ES, YM, ER, US, euro)
• 25 percent swing trades on futures (NQ, TY, C, W, S, CL, GC, SI, single stock futures)
• 25 percent swing trades on stocks
• 25 percent swing trades on stock options

This is a really important part of the online stock trading plan. A online stock trader should have a specific setup for each market he or she is trading. The setup can then be tracked for performance. Each setup should be independent of itself. This means a online stock trader could have a short on the YM for a gap play and a long on the ES for a moving average play simultaneously, and then track the performance of each setup separately.

For intraday trades, I will use the following plays:

• YM: gap plays and pivot plays
• ES: Relative Strength Index (RSI) divergences and moving average plays
• ER: squeeze plays
• US: doldrums play
• Euro: box plays and bracket plays

• All futures plays: daily crossovers in the direction of the weekly charts
• All stock plays: emerging new companies, high RSI and high earnings
• All stock options plays: daily crossovers in the direction of the weekly charts

This, of course, is critical. The key is to find an allocation that doesn't cause any stress, allows the chance for a trade to do its work and doesn't violate any daily drawdown rules. One of the biggest problems with newer traders is that they are trading way too big in relation to their account size. Online stock trading ten lots on a $10,000 account is like introducing your mistress to your wife. Yes, you can do it, but that doesn't make it a good idea.

The following allocations are based on a per $100,000 basis. The number of contracts or position size to be used is as follows:

What Execution Methods Will I Be Using? What Parameters In My Online Stock Trading

This is where I decide my primary execution method. Am I scaling in? Scaling out? Getting all in and all out? What is my risk/reward ratio? This is a lengthy part of the plan, as I will write down sample plays for all categories. There's not room to do that with all of them here, but for the sake of example, here are my parameters for gap plays.

For all intraday plays in online stock trading, I will get in all at once and scale out as the position goes my way. The target on the first half of my play will be small, the equivalent of one to two ES points. Once I have this initial profit, I will give the second half more room to play out. For swing plays, I will get in all at once and get out all at once, trailing my stop to protect any gains.

Gap plays: Get in all at once using six contracts per $100,000. Start off with a 1½-to-1 risk/reward ratio. For example, for a 20-point gap, use a 30-point stop. Take off half of the position when the market hits the level that is equivalent to 50 percent of the gap fill. At this point, move the stop to breakeven. The target on the second half is the gap fill. I do this for each of my plays so there is no question as to how they should be executed. This is crucial as it ties in directly with the next portion of the plan.

How Am I Going to Track and Rank My Online Stock Trades?

This is where I detail how I am going to track each of the setups I trade and how they are working. I track this information in excel so a running average can be calculated.

I will track all of my trades and rate them as follows:

• 5: target hit
• 4: out at a different price than target, but profitable
• 3: out at even
• 2: out at a different price than stop, but a losing trade
• 1: stop hit

IMPORTANT: Any trade I take that does not fall into a specific trading setup or chart pattern I have outlined will be labeled as follows: impulse play.

Indeed this is a weakness, but if I succumb to this temptation, at the very least I must track it and see the impact it has on my trading. I know from past experience that the results of any impulse plays over time are poor, and this reminder keeps me from taking these trades. I will jot notes on these online stock trades. Did I jump in too soon? Did I miss a fill? Did I chase?

I also will note any overall trends in my online stock trading trading. How many days did I start off losing but end up on the plus side? How many days did I start off strong only to give it all back? What was going on that day in terms of interruptions? I know from past experience I get in trouble when I start off strong and start to go for "bigger trades with house money." I will keep track of any days where I let greed get the best of me, then work on reducing the amount of those days.

What Are My Drawdown Rules for 2005 in my online stock trading?

If I am down 15 percent for the month, I will cut my position size in half for the rest of the month. If I am down 20 percent for the month, I will stop trading the rest of the month. If I hit a 30-percent total drawdown, it is time for a six-week break from trading. My daily drawdown max for intraday trading is $3,000 per $100,000. If at the end of the day I exceed this level, I am on probation the next day. If I exceed $3,000 per $100,000 again that week, I am done for the rest of the week. This is my punishment for breaking trading rules. I will hedge commodity swing trades in volatile markets with options.

What Are My Profit Rules for 2005in my online stock trading?

My target daily average goal for intraday online stock trading is $500 per day per $100,000. This is conservative and achievable, and it equates to $120,000 a year. I will focus on generating five $2,000 per $100,000 days per month. This means I don't have to trade every day. I know from past experience my best trading days are Tuesday, Wednesday and Thursday. Thus, I will focus more on trading on these days. If I am up more than $2,000 per $100,000 before noon, I will continue to trade until I have a losing trade, at which point it's time to stop for the day. If I have a day where I make $5,000 per $100,000, I will take the next day off to escape those feelings of euphoria that cause online stock traders to do stupid things like double up on positions or trade without a stop. I will stop online stock trading for the rest of the month at $20,000 per $100,000. I will track my daily equity curve by using an excel spreadsheet.

I will withdraw 50 percent of my online stock trading profits at the end of each quarter. I will never add money to an account that is down and will never meet a margin call. I will add money to an account that has proven itself with positive returns. The reason I will withdraw online stock trading profits is because this is the best way to protect them. These profits allow me to invest in other asset classes, pay for family vacations and fund other projects. It also is a reminder that the numbers on the screen are real and represent real cash.

My Office Setup for Online Stock Trading?

I have a separate condo that is set up specifically for online stock trading, with five computers and 12 monitors. I have cable internet access with back-up dial up, plus two phone lines, a fax and a cell phone if things go wrong. My goal this year is to get another assistant who helps only with order entry and to program more of my trading setups to generate mechanical signals. I have looked at regular office space but find the solicitors and general banter too distracting for trading. There are pictures on the wall and a large fish tank to watch when it's time to take a break from watching the computer screens.

What Are My Rewards If My Online Stock Trading Is Going Well?

This is where I establish goals that motivate me to stick to my online stock trading plan. I know that if I stick to my online stock trading plan, my trading has a better chance of succeeding. And if I succeed, I get to do these things.

When I hit 60 percent for the year, I will take the next four weeks off. If this occurs in the fourth quarter, I will take the rest of the year off. I could go for more money, but it is enough. I want to spend two weeks in northern Italy and Switzerland, or take four long weekends and go to a beach and do nothing. I want to visit Australia, Hong Kong and New Zealand this year, whether on business or for pleasure. I like to watch movies, and I would like to upgrade my home theatre system. I saw a Rolex that I want to buy, and my goal is to get it this year.

But I realize that I need to focus on the online stock trading setups, not on the money needed for the rewards. If I focus on the money, I will lose. If I focus on the setups, I will win.

Are There Any Groups, People or Organizations I'd Like to Help Out This Year? Last year I sent some money to the Salvation Army, but I don't really feel any impact when I donate money to big charities. I would rather help out individuals. For 2005, find a struggling artist who has talent and support them for a year. Provide start-up funds to an inner city youth who wants to launch a business. Pay for a ten-day vacation that brings all of your family members together.

What Are My Specific Online Stock Trading Plans for Staying on Plan throughout the Year? This is where I add any notes I have gained from my own experiences to help me stay profitable in my trading.

After a $5,000 per $100,000 day, escape any feelings of euphoria by taking the next day off and doing something that humbles you, like playing golf.

Do not trade the S&Ps between 12:00 and 2:00 p.m. unless you are managing an existing position (do not initiate any new trades). Between 8:30 a.m. eastern and 10:30 a.m. eastern, leave your instant messaging service off, do not check e-mail and do not answer phones. In the day trading chat room, let people know you will not answer questions during this time. Minimize the day trading chat room window so you do not read what is going on in the day trading chat room. Do not trade anything during the overnight session. Better yet, don't watch it either.

If you quit early due to a 20-percent month, physically get away so you cannot trade. Do not trade after noon on Fridays. Focus on trading lighter during the last three days of options expiration, or consider not trading at all. Review your performance during this time and consider this as your time off during the month. For the past year the market seems to do absolutely nothing during this time. Focus heavily on the first two trading weeks of the month. After the first two trading weeks are over, take the next two trading days off and get away from the markets. Give your brain a rest. Take off entire week of Thanksgiving. Take off last two weeks of the year. Plan your vacations in August, as you won't be missing anything.

Going Forward

This is the online stock trading plan. The key here for me is complete and accurate daily records so that I can assess my trading, review my progress on a month-by-month basis and make changes in strategies based on my performance.

The fun in online stock trading comes from the thrill of the hunt, the anticipation of the kill. Clearly, all of the research and work culminates in a single moment in time when a trader makes a decision to pull the trigger and shortly thereafter is presented with the results.

If a online stock trader can string enough consistent winners together, it opens the door to a whole new life of independence. The lure of this challenge draws people from all ages and all walks of life into the markets. Those who can face up to the challenge of drawing up a plan to pave the way will have the odds of success in their favor.