T r a d i n g P l a n

I N T R O D U C E DB Y C E N T U R YF I N A N C I A LB R O K E R S D U B A I

Investment strategies: Creating a trading plan

A good trading plan evolves and changes

When you rst start investing, its useful to record all aspects of the trades you place. By reviewing and evaluating the results against a trading plan you will be able to identify shortcomings in your strategy. You can use this information to identify areas where you can improve and to help you remain disciplined. When you close out positions you should try to always review the results, this allows you to track performance, identify patterns and adjust your strategies accordingly. Keep this information and review it again when looking to invest in the same product again in the future.

It will only be possible to complete this section once the rest of the trading proposal has been nished. It will be a nal review of this question that will determine if the trade should be carried out or not.

What fundamentals are currently affecting this instrument?

Even if you are a technical analyst, fundamental information should still have some bearing on your decisions. Its a good idea to make a note of what you believe to be the most important recent developments. Why not look at previous fundamentals and review their impact on the products price to gain a greater understanding on the recent releases?

Justifying your proposal to trade

More experienced investors always have a have a preparatory routine to work through before each trade is placed. For those wishing to become more focused in regards their investing, here are the building blocks to create a detailed trading plan. These are some of questions to consider before entering a position. This list is not exhaustive but it will give you a good framework to build your own strategies on. Why are you doing this trade? What fundamentals are currently affecting this product? Are there future fundamental risks due in your time horizon what are they, when are they due? What are the recent support and resistance levels? How do they compare to your proposed entry point? What are your proposed stop loss and initial target price levels? What risk reward ratio are you using? Have you checked your favourite technical indicators? Are there any conicting signals? Is there past historical data that can back up your view? Are there any correlations that can impact your view i.e. index, Dollar or commodity focus? What percentage of your total capital are you risking on this position, can you justify this? What amount of margin do you plan to commit to this position and how does that compare to your total account balance in percentage terms? Why are you doing this trade? This should be an overview of the main arguments for and against doing the trade. Every position will have positive and negative aspects, its important to be honest with yourself and to note them all down.

Are there future fundamentals risks due in your time horizon what are they and when are they due?
If you are trading a stock, you should be aware of any potential Final, Interims or Quarterly Results, Trading Announcements, AGMs and ExDividend dates etc. Most rms will give advanced notice of nancial announcements but some news ow will come out without warning. It is equally important to be aware of some of the biggest economic gures due out across the world, from Ination gures and Interest rates to Non-Farm Payrolls and employment gures. These economic announcements can have a huge impact on current open positions and its best to be aware of them before the news is out. If a major data release is totally against your view and the market moves strongly against you, you need to have a plan B in place.

What are the recent support and resistance levels? How do they compare to your proposed entry point?
Most investors will choose to wait for the price action to trade near or through a recent signicant support or resistance level (signicant high or low) in order to get the best risk to reward ratio (how much you are risking compared to your potential reward). The further the price is trading away from these potentially critical levels, the bigger the potential downside risk. A difcult scenario is when a price is trading between two ranges, if this is the case it can be worth waiting for a more strategic price. Alternatively, you can reduce your position size to compensate.

What are your proposed stop loss and initial target price levels? What risk to reward ratio are you using?
Its a good idea to determine an exit strategy for both directions of your positions, whether it goes against you or in your favour. It would be reckless to invest without suitable risk management in place, one would be taking on unnecessary business risk that is hard to justify. Many investors utilise a 3:1 risk to reward ratio. For example, a risk of 1000 per trade would require a potential initial reward of 3000.

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Risk to reward ratios can be set using stop losses and take prot orders appropriately. Once a stop loss level has been selected, often a few percentage points away from a signicant support or resistance level, caution should be taken if you want to move it in the future. By moving your stop losses you can increase your potential losses. A common mistake is to run losses by moving stop losses if positions start to move in an adverse direction.

What percentage of you r total capital are you risking on this position, can you justify this?
Its never a good idea to risk large portions of your total capital on any one position, or to invest in multiple products that are all strongly correlated - if one drops in value, they could all follow suit. The percentage of your total capital at risk should be directly linked to the strength of your trading proposal, but remember, there are no guarantees that the market will do what is expected. Also consider unforeseeable fundamental events. The 9/11 attack is an example of an unforeseeable event that had a major impact on the markets.. There is rarely any prior warning surrounding such events; think about how you would react.

Have you checked your favourite technical indicators? Are there any conicting signals?
its advisable to gather further technical evidence that can back up your view on the potential direction of the product - remember to check for divergence (when a technical indicator is moving in the opposite direction to the price). Many investors like to check 21 and 55-period SMA, the RSI, MACD and Slow Stochastic, before taking a position. Overlaying a Fibonacci retracement can also be useful in helping you to identify additional potentially signicant price levels. The more technical evidence you have, the more condent you will feel about your position. Conicting signals are a business risk and should have an impact on the size.

What amount of margin do you plan to commit to this position and how does that compare to your total account balance in percentage terms?
Most investors would try not to commit more than 20% of their total account balance as margin on any one position. This kind of caution can stop over trading and keep additional capital free for other opportunities. When investing longer term, less nancing and more margin is recommended (this can help to keep nancing costs down). For shorter term trades, less than one week for example, making use of greater nancing can be useful as it leaves you more free equity to capitalise on the longer term, higher margin positions.

Is there past historical data that can back up your view?

Statistical evidence can add further weight to your trading proposal. Look for existing trends or a signicant level that has remained intact, to back your view. For example, if youre looking at a double top (a classic technical analysis formation) on EUR/USD, why not go back a few years to check how many double top patterns occurred in the past and what percentage of them resulted in a trend reversal? You are looking for evidence to support your way of thinking. A lack of evidence should make you consider a lower trade size.

Putting it all together: An example of a trading plan

Name of product: US30 Date: 2/12/XX

Are there any correlations that can impact your view i.e. Index, Dollar or Commodity focus?
If you were looking to invest in a UK mining stock, then you should also look at the UK100 index to see if its trend is expected to follow your view on the equity. Obviously commodity prices have an impact on mining stocks, so you could also check if their trends support the same view. Next, the strength of the US Dollar has a direct impact on commodity prices, as most are quoted in Dollars, does this have an impact on your trade proposal? There can be negative correlations to be aware of, for example, an increase in the price of West Texas Crude might have a negative impact on an airline stock you should always try to consider outside forces.

Why are you doing this trade? Remember to do this section last, once you have collated all your evidence.
There appears to be good fundamentals behind this index (great earnings session, Non Farm payroll gures were very positive and unemployment is falling) and the technical factors match up (nice uptrend and good entry point available). A decent risk/reward ratio seems possible, although could be slightly better. There is some risk of a short term pullback due to over bought markets but Im relatively happy with the rest of the set up.

What fundamentals are currently affecting this product?

Non-Farm payrolls came out at 120k today, which was better than the consensus of 80k, the US economy looks like it is recovering. 78% of the companies that have reported earnings have beaten

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forecasts so far with two major rms having reported big gures already this afternoon.

What amount of margin do you plan to commit for this position and how does that compare to your total account balance in percentage terms?
Im planning on committing 20% of my available balance as margin to cover my position, this still leaves me additional funds for other opportunities.

Are there future fundamental risks due in your time horizon? What are they and when are they due?
There are 6 other major rm reporting earnings next week, 3 of them on Friday. They are expected to be at the top of analyst expectations. The US trade balance is due on Wednesday which is expected to show some improvements.

What are the recent support and resistance levels? How do they compare to your proposed entry point?
Support at 12900.00, resistance at 13321.00, entry at 12970.00, going long.

What are your proposed stop loss and initial target price levels? What risk reward ratio are you using?
Stop loss at 12850.00, target 13320.00 using a 2.7:1 risk reward ratio

Have you checked your favourite technical indicators? Are there any conicting signals?
The 55 period SMA seems to be providing support. As the US30 is trending, Im using the MACD, which is close to giving a bullish crossover signal. Used a Fibonacci Retracement, resistance seems capped by the 38.2% level. The RSI and Slow Stochastic are both in the middle of their ranges but not really used much in a trending market.

Is there past historical data that can back up your view?

The US30 has a history of following decent trends (average length around 5 months). We are currently 3 months into this uptrend and it has bounced of its 55 period MA 6 times in the last 6 months

Are there any correlations that can impact your view i.e. Index, Dollar or Commodity focus?
Most global indices are following suit in the direction of my trend. Gold is dropping as investors move away from safe havens looking for better returns. US crude is also spiking indicating improved global economics.

What percentage of your total trading account are you risking on this trade, can you justify this?
Im risking 5% of my total trading capital on this trade, if I get stopped out. I am happy with this amount.

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