[David Waring]

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In our last lesson we finished up our discussion on trading journals with a look at the important things to look for when reviewing past trades. In today’s lesson we are going to discuss how to handle trading like a business with a discussion of how to compile a trading business plan.

One of the leading causes for the failure of many businesses is their lack of planning. I think most successful people would agree that if you want to be successful in life and business you need to have a plan for how to obtain that success, set goals to meet along the way, and then work on executing your plan and meeting your goals.

Trading is no different from any other business in this sense and it is my opinion that those who fail to plan out their trading like a business are doomed to failure as well. With this in mind it is important to have a written business plan for your trading just as you would for any other business. Below are some of the things which should be included in that plan, most if not all of which you should now have a good understanding of if you have watched all of our lessons up to this point.

• What are your reasons for wanting to become a trader?
• What do you hope to gain from trading? Be specific here. If the possibility of making a lot of money has drawn you towards trading then list out how much money you want to make from trading and what you plan to do with that money if you make it.
• What are the things that are going to separate you from the large majority of traders who fail?
• What are your biggest weaknesses?
• How do you plan to address your weaknesses and leverage your strengths?
• How much time can you devote towards actively following the market?
• Do you plan to day trade, swing trade, position trade or a combination of the three? Does your choice here reflect the time you have to devote to the markets?
• What market or markets do you plan to trade and why?
• At what times throughout the day are you going to spend actually trading, researching trades, and then learning about the market?
• What are your criteria for entering a trade?
• What are your criteria for exiting a trade?
• What is your money management strategy?
• How will you know if one of the pieces of your strategy stops working?
• After identifying that one of the pieces of your strategy has stopped working what will you do to address it?
• What trading software and equipment you will use to trade and how much is it?
• What Broker/Brokers will you use?
• Do you plan to add money to your account and if so where is that money going to come from?
• If you are profitable do you plan to reinvest profits or withdraw some or all of them?
• If you plan to trade full time how you will support yourself if you aren’t profitable right away.
• How much money do you plan to start to trade with? Does the math work out when considering taxes, all costs, living expenses and your initial trading balance?

As you can see, just as with any business, there are many things to consider before jumping into trading. From my experience however those who actually take the time to think about and write down the answers to each of the above questions have a much higher chance of success than those who do not.

That’s our lesson for today and this completes the InformedTrades.com basics of trading course. I hope you have had as much fun and learned as much from our first trading basics course as I have from putting it together.

In our next series of courses we are going to be covering the basics of trading all of the different markets that are available to traders starting with the basics of forex trading so we hope to see you in those lessons.

As always please feel free to leave any comments or questions in the comments section below, and good luck with your trading!

[jaro g.]

hi david,

thanks for all your (video-)postings and for the huge amount of time you have dedicated to produce them in order to help others ;-)). i have watched all 94 videos on youtube and i'm sure they will help me better understand the financial markets and also improve my trading (results)...

by now, my success or failure depends much more on luck, misfortune or general market movements than on some clever strategy / money + risk mngmt / etc. ... so there is a lot of space for improvement :-)

well, after nearly 3 years of trading/investing in commodities and commodity stocks without any written business plan, i'm going to develop my personal business plan on the weekend and i'm curious if i will (by writing that plan) 'discover' some points/facts about myself which shouldn't be ignored in my trading ;-)

bye-bye + greetings from munich/germany,
jaro.

[David Waring]

Hi Jaro,

Glad to hear you are finding the videos useful. A great book if you have not read it which goes into much more detail on the trader's business plan and how to evaluate yourself in general is Dr. Van K Tharp's book trade your way to financial freedom.

Best Regards,
Dave

[jaro g.]

hi david,

i haven't read that book yet, but there is already a signed(!) copy of its german version in my books2read-pipeline as i have attended a presentation / investors' evening with Dr. Van K Tharp in munich (end of february ;-)

bye-bye,
jaro.

Hi Dave,
great videos! I wanted to know about the risk to rewards ratio and their importance regarding all trades. I have noticed that a lot of the potential winning trades do not always carry out the risk reward ratio of 1:2 (ex: risk 50 pips to gain 100 pips)

For example head and shoulders pattern, flags and pennants; are these and other techniques exceptions to the risk reward? Thanks!

[nadi]

HI
HOW R U?THE VIDEOS OF YOUR LECHTURE IS NOT AVAILABLE WHERE THAY GOES. THANK YOU

[David Waring]

Originally Posted by jaro g.

hi david,

i haven't read that book yet, but there is already a signed(!) copy of its german version in my books2read-pipeline as i have attended a presentation / investors' evening with Dr. Van K Tharp in munich (end of february ;-)

bye-bye,
jaro.

Hi Jaro,

Wow I am jealous as I have not had a chance to attend one of Dr. Tharp's seminars. Please let us know how you enjoy the book.

Best Regards
Dave

[David Waring]

Originally Posted by Unregistered

Hi Dave,
great videos! I wanted to know about the risk to rewards ratio and their importance regarding all trades. I have noticed that a lot of the potential winning trades do not always carry out the risk reward ratio of 1:2 (ex: risk 50 pips to gain 100 pips)

For example head and shoulders pattern, flags and pennants; are these and other techniques exceptions to the risk reward? Thanks!

Hi There,

Thanks for the comment I am glad you like the videos.

With some of the stronger chart patterns such as the Head and Shoulders many traders feel that the percentage of the time that they lead to their expected outcome is large enough to warrant a lower reward to risk ratio than they otherwise would.

So I would not say that these are exceptions to any rules but I would use the patterns as a guide for determining your own parameters for trading the patterns and not as a rule for trading them. So for example if through your own analysis you find that the head and shoulders pattern works out the large majority of the time the way you expect it to then you may be comfortable with accepting a lower reward to risk ratio. If not however then you may want to adjust the entry and/or exit to fit within your parameters or not take the trade at all.

Hope that helps. If anyone else has any input here please feel free to post below.

Best Regards,
Dave

[David Waring]

Originally Posted by nadi

HI
HOW R U?THE VIDEOS OF YOUR LECHTURE IS NOT AVAILABLE WHERE THAY GOES. THANK YOU

Hi Nadi,

I am well thank you and I hope you are.

I apologize but I do not understand the question here are you saying that you are not able to view the videos?

Thanks
Dave

Originally Posted by David Waring

Hi There,

Thanks for the comment I am glad you like the videos.

With some of the stronger chart patterns such as the Head and Shoulders many traders feel that the percentage of the time that they lead to their expected outcome is large enough to warrant a lower reward to risk ratio than they otherwise would.

So I would not say that these are exceptions to any rules but I would use the patterns as a guide for determining your own parameters for trading the patterns and not as a rule for trading them. So for example if through your own analysis you find that the head and shoulders pattern works out the large majority of the time the way you expect it to then you may be comfortable with accepting a lower reward to risk ratio. If not however then you may want to adjust the entry and/or exit to fit within your parameters or not take the trade at all.

Hope that helps. If anyone else has any input here please feel free to post below.

Best Regards,
Dave

Thanks for the reply > regarding the Head and Shoulders pattern trade, when placing the stop loss above the right shoulder, it seems that it is more likely to be a 2:1 reward ratio rather than a 1:2 reward ratio, correct? It is not going to be a feasible trade to place lower than the shoulder, is it?