Investors and traders alike spend time at this time of year contemplating the future along with mapping out a plan for it. The trading plan is a critical element for success, so no matter where you are in the process, keep it at the forefront throughout 2013. If you don’t have a working draft of your plan it may be a daunting project; however, having some base document allows you to improve your results going forward.

For those who wish to build a personal, comprehensive plan, Cornerstone can guide you through the development process. This home study course from Optionetics provides a thorough collection of questions, material and resources that can serve as the foundation for your efforts in the area. It is geared towards you creating a rational plan that suits you.

The content provided in articles is no substitute for the depth of materials in Cornerstone, but hopefully it will at least get you moving forward in this important process.

Cornerstone Trading Plan Elements

The following outline from Cornerstone can be considered in your plan development:

Core Trading Style: MATA

New traders need to spend some time exploring different style areas to determine which makes the most sense to them. For those with a bit of a track record, evaluate your trade history to assess your success with different types of methods, time intervals and approaches. If you cannot readily do this with the records you keep, take some time now to identify those things you need to add to complete this process in the future.

The following style elements may help you structure an assessment that helps you develop your personal plan:

• Method:  Pure Mechanical, Guidelines, Discretionary
• Analysis: Technical, Fundamental, Economic, Blend
• Timeframe: Short-Term, Intermediate-Term, Long-Term
• Approach: Directional, Non-Directional, Volatility

Most traders will probably not select one item in each category as part of their trade identity. For instance, most trader will not limit themselves to intermediate-term, discretionary, directional trades that are based on fundamental analysis. There may be an allocation to that type of position or a preference for it, but for the most part, traders will find their style blends these elements.

When developing your plan, begin with the elements that best suit your style and build from there. 

When evaluating past performance, be sure to remind yourself that a successful trade is not equivalent to a profitable trade. You can have a successful trade that followed the rules and cut losses as appropriate or a profitable trade that went against the rules and should not be considered a successful one.

To help identify style oriented assessments, consider these two questions:

• What methods, signals or approaches get you out of a trade you should exit?
• What methods, signals or approaches keep you in a trade you should remain?

Guideline traders may have a variety of set-ups and exit tools in their arsenal. It’s the ones that you rely on when you are uncertain about market conditions that may provide you with hints on your personal style.

Preferences

While preferences may also be part of your personal trading style, these elements are a bit more tangible and straightforward. They are more likely chosen because they suit the style you’ve identified in the first section. For instance, a volatility trader may elect a specific option strategy that will benefit in a high volatility environment.

• Market
• Strategies
• Systems

A plan should list the different markets, strategies, and systems employed, then provide specifics on how trading is implemented within them, along with details on why they suit the trader. 

Management

In general terms, money management speaks to allocations while risk management addresses max losses. In each case these items are quantified with the manner in which they will be managed (i.e. physical stop orders to manage risk).

Different management elements of a trading plan include:

• Money Management Rules
• Risk Management Rules
• Trade Management Rules

A last step includes Plan Management which incorporates periodic reviews and updates to better tailor the plan to your preferences, needs and constraints by being more conscious of what is and what is not working for you.

Clare White, CMT
Contributing Writer and Options Strategist
Optionetics.com ~ Your Options Education Site

Questions for Clare? Please visit the discussion board on the homepage of Optionetics.com.