Chris Conway on how to build a trading plan

You wouldn’t start a business without a business plan, so why would you start (or continue) trading or investing without an investment plan? In the Your Wealth episode 'How a successful trader learned his craft' with Chris Conway, his most important piece of advice was to have a plan for how you engage with the market. In what will be a three-part series, Chris provides a blueprint for building your plan and whilst the focus is on trading, the questions are relevant to anyone engaged in financial markets. 

In the first instalment of the Trading Plan series, we will focus on who you want to be in the market, goal setting, and what you will trade and over what timeframe. 

Step 1 - It's all about you

Often, people come to financial markets with preconceived ideas about what type of trader or investor they will be. These ideas can be shaped by well-known investors (I’ll be a long-term value investor like Buffett), by Hollywood (I’ll be trader like the Wolf of Wall Street), or by any number of influences. Most people don’t lend much serious thought to who they want to be in the market, so the questions below are designed to help you start forming that view. Having been through this process (multiple times), it’s amazing how much you will learn about yourself and your approach to the market when you start writing things down. When I did it, many years ago, I found that my answers took me in a different direction than I thought they would and helped me to clarify my purpose. 

Question 1 – Why do you want to be a trader (or investor)

Let me give you a hint, it is unlikely that it’s just about the money. By pinpointing these reasons, you will be better prepared to answer the questions that come later regarding risk tolerance; 

• I want to be a trader because...
• My number one goal in becoming a trader is...
• My secondary goal(s) in becoming a trader are...
• These goals are important to me because...
• I believe I can fulfil these goals by...

Question 2 – What sort of trader do you want to be?

There are many types of trading and trader. If you are not familiar with some of the terms listed below, then that’s probably a pretty good sign that you still have plenty of research to do. What type of trader you want to be will largely be determined by the amount of time you can devote to trading? For example, you will not be a day trader if you spend 9-5 working away from a computer (unless you plan on trading US markets at night and never sleeping). 

• I will be a position/swing/trend trader...

Question 3 – What are your strengths and weaknesses?

Taking an inventory of your strengths and weakness will again help with risk tolerances and what type of trader you want to be. Are you a conservative driver who doesn’t like driving fast? Are you a thrill-seeker who likes to act on impulse? Are you super organised at work? If you think about it, all the traits I just mentioned could be perceived as both strengths and weaknesses. When thinking about traits, think about how they might affect your decision making, risk profile, organisation, etc. If you are still struggling, try paper-trading for a while to see how you will react in certain situations. Patterns will begin to emerge which will help you to identify your strengths and weaknesses.

• My most valuable strength is...
• How do I think this strength will help in my trading?
• My biggest weakness is

Question 4 – Do you have the right mindset to be trading?

Are you currently at a point in your life where your situation is conducive to trading? Trading can be quite stressful, so it should not be lumped in with other significant stresses in your life. Trading requires a significant degree of mental strength so if you are currently faced with significant personal issues, maybe it’s best to put your trading career off for a while. The market isn’t going anywhere and you can come back to it at any time. 

Step 2 – Set some goals

This step is about actually taking some time to think about what you want to achieve in the market. Please don’t trade aimlessly. Precision in your plan is as important as precision in your entry and exit signals. Set goals. Make them realistic. ‘Making money’ is not a goal. It’s a given. If you’re not doing this to make money, go play golf.

Question 1 – What are your trading goals?

Often confused with your financial goals. Trading goals are different in that they concern your development as a trader. Your trading goals should provide you with a way to track your progress. If you set appropriate trading goals, your financial goals will be easier to achieve. Once you have defined your goals, then decide how you will reward yourself once you achieve them.

• My yearly/monthly/weekly trading goal is... to follow the plan!
• My monthly trading goal is to review my performance to spot any problems as they occur and make the necessary adjustments
• My monthly trading goal is to strictly adhere to my new stop loss strategy, to test its effectiveness
• My yearly trading goal is to develop my ‘edge’ by seeking further coaching from experienced traders, refining my trading plan, and refining my strategies
• If I achieve these goals, regardless of the financial outcome, I will reward myself by...

Question 2 - How much money are you aiming to make?

Many new traders never ask themselves this question before they begin trading, let alone answer it. We all want to make money but the response ‘as much as possible’ is not good enough. You need to know what it is you are chasing after before you go chasing after it. Be realistic. Don’t expect that you are going to turn $10,000 into $1 million overnight. The average return for the ASX over the past 30 years is about 9.5%. Your goal might be to match that return (although you could get that result simply by sticking your money in a low-cost index fund) or to better it by a certain percentage.

• I will aim to return x% in a 12-month period
• I will aim to return x% each month
• If I achieve my goals, I will reward myself financially by...

Don't forget to reward yourselves... you can't take it with you and trading and investing is hard!

Step 3 - What will you trade and over what timeframe?

What you trade should fit in with your lifestyle, your ability to access a computer (don't trade on your phone, please), and to conduct research. In my experience, trying to trade everything means you will be like Jack... a master of none. 

Question 1 – Which markets will you trade?

This seems straightforward but there are some guidelines you should follow. If you previously have some experience with a certain stock/sector/market, then consider starting with what you know. Most people have some familiarity with equities (often longer-term investing) so this would be the logical place to start. Try to limit the number and type of markets you trade when you first start out. Expert traders are usually extremely well versed in limited fields, i.e., equities -top 20/50/100/300, certain sectors (maybe the industry that you work in), commodities, foreign exchange (FX), etc, rather than knowing a little about a lot. 

• The instruments that I will trade are...
• I will trade these instruments because...liquidity/volatility/they fit with my schedule
• If I trade Australian equities, I will focus on the ASX 100/200/300/mining/banking/mid-caps/blue-chips

Question 2 – Which timeframes will you trade?

Timeframes are often difficult to nail down but think about it in terms of how long you anticipate holding your position, as that will help determine the charts and other inputs you will be looking at. If you want to be in and out quickly, shorter timeframes are more suitable. If you want to be holding your trades for months, then you will use different tools. 

• As an intraday/swing/trend/position trader I will use a 1-, 5-, 10-, 30-minute, 1-, 2-, 4-hour, daily, weekly, monthly, chart 
• To get a read on the broader trend, I will also consider x higher timeframe

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Analysis as at 04 May 2022. This information has been provided by Marcus Today (AFSL is 473383), for WealthHub Securities Ltd ABN 83 089 718 249 AFSL No. 230704 (WealthHub Securities, we), a Market Participant under the ASIC Market Integrity Rules and a wholly owned subsidiary of National Australia Bank Limited ABN 12 004 044 937 AFSL 230686 (NAB). Whilst all reasonable care has been taken by WealthHub Securities in reviewing this material, this content does not represent the view or opinions of WealthHub Securities. Any statements as to past performance do not represent future performance. Any advice contained in the Information has been prepared by WealthHub Securities without taking into account your objectives, financial situation or needs. Before acting on any such advice, we recommend that you consider whether it is appropriate for your circumstances.