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The Trading Plan – 3. The Trading System or Strategy

December 7, 2011
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This section of the Trading Plan is the “how” section. It must be aligned with your mission and goals and objective statements and states how you will go about achieving your purpose and objectives, that is, what action you will take and precisely what criteria you will use to decide whether to buy, hold or sell for any given set of market circumstances.

The most important part in this section is the trading system or strategy that you will employ to engage the market to allow you to achieve the goals you have set, and that are aligned with your overall mission statement.

    • Every investor should have either a trading system or strategy that has an edge. As such you should have or acquire the skills to be able to determine whether an edge exists and what the quality of the edge is.
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    • Your strategy must guide you on when to buy and when to sell and clearly identify the criteria that you will use to enter trades and the criteria you will use to exit trades. It comprises technical and / or fundamental criteria based on price action and / or indicators / ratios that are unambiguous.
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    • Exit rules must be clearly defined for both profitable and losing trades so you know exactly when to exit the trade free of any emotional attachment to the outcome of each and every trade.
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    • You should outline whether you are going to design your own strategy or seek the services of a trusted professional. Designing and building your own make take months or even years of time and effort. Buying a system with an edge that has demonstrated results from a reliable vendor will allow you to engage the market much sooner. You might also consider buying and using a system and still developing your own over time – thus giving you the results of the system you have purchased and the satisfaction of developing your own system as your experience and knowledge expands.
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    • Your strategy should take into consideration how much time you have to invest and engage the markets and then be aligned with the time you have available. There is little point attempting to be a short term trader if you have a full time job, business or career that keeps you engaged 10 hours per day, 5 days a week and affords you little, if any, time to look at market action through the trading day!
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    • Your trading system should also be aligned with the instruments being traded which in turn will be determined by your goals and objectives. For example, if you have an objective to achieve 50% returns p.a. this will be impossible to acheive by trading the top 20 stocks by market capitalisation with no leverage. Also, profit targets for trading a 100:1 or 10:1 leveraged instrument would be different to profit targets set for an unleveraged instrument or for a very volatile or low volatility instrument / stock.
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    • How much capital you have to invest will also determine the time frame of your system, being an intraday, short, medium or long term strategy. For example, the Forex trader trading a bank of $10,000 or an options trader trading with a bank of $30,000 still has to deploy an investing strategy for his $200,000 (or $500,000 or $1M) super fund or otherwise. These will be vastly different strategies (even if in property).
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    • You should make sure that your strategy sits well within your investment profile and goal and objectives.

Can’t wait until next week? Read the next blog in The Trading Plan series:
The Trading Plan – 4. Risk and Money Management

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