Make Money Online Trading Plan
The most important task an online trader can make is defining your goals and making a plan. Sticking to your plan is just as important! If you want to make money online trading, make your online trading plan and stick to it.
Most online day traders refer to their day trading plan as a trading system. This is true. Think of your system as franchise like McDonald’s. Every hamburger is made the same way. No exceptions. Your trading plan should be just as concrete if you plan on making money online trading.
Here are the elements of a good day trading plan:
What can you expect when trading a system?
Financial Goals
How much money do you want to make?
How much money do you need to get started?
Selecting your market
To make money online trading you need to determine what you want to trade. It really doesn’t matter WHAT you trade, as long as you’re successful. Most professional traders will trade futures contracts to make money online trading because of the incredible leverage and liquidity. Each market has advantages and disadvantages which we will discuss here. This will make it easy to find the right market for YOU.
Selecting your time frame
In this section you will learn the differences between daytrading, short-term trading and long-term trading and how to find the best approach for YOU.
Selecting your trading style
Trend-following, Swing-trading or Trend-fading? In this section you’ll learn which trading style is the best for YOU.
Detailing your online daytrading plan
This is easier than you think. I already have a few ready-to-use trading systems for you such as Futures Trading Secrets. By now you know how much money you want to make, how much you are willing to risk, what market you are going to trade in which time frame, and what trading style you’ll use. In this section you will learn how to detail your plan by adding specific rules for entries and exits.
Ready to start?
Financial Goals
Many aspiring traders ask “How much money can I make?” Many novice traders think of trading as an instant ATM machine. There is no easy answer, because it depends how much you are willing to risk.
To make money online trading is a function of risk and reward: The more you risk, the more you can make. Let’s start with easy example: You have $5,000 account and you’re willing to risk $1,000. Now you could place a trade to go long at the opening, set a profit goal of $1,000 and a stop loss of $1,000. Let’s say you investigated the market behavior in the past couple of months and realized that your chances of achieving your profit goal are 60%.
Your very first trade is bomb out. You lose the whole $1,000. Since this was the amount you were wiling to risk, you close your account, transfer the remaining $4,000 back in to your checking account and that’s it for you.
Let’s set the risk lower. You decide risk only $100 per trade and you adjusted your profit goal to $100, too. This will allow you to make at least 10 trades, because only if all 10 trades are losers you’ll lose the $1,000 you are willing to risk. I don’t want to become too mathematical, but statistics says that the probability of having 10 losing trades in a row is less than 1%. Therefore it’s highly likely that you will have a couple of winners within the 10 trades. If your trading system shows the same performance as it did in the past (60% winning percentage), you should make $200: 4 losing trades * $100 = -$400 + 6 winning trades * $100 = $600. Make sense?
Compare these two options:
In scenario 2 the risk of losing your money after 10 trades is less than 1%, but you have a good chance of making $200.
The risk of losing your money in scenario 1 is 40%. But if you won, you would have made $1,000.
Remember that there is a difference between the amount you need to trade and the amount you’re willing to risk. Your broker is always asking your for a “margin”, and you need to fund your account with that margin requirement + your risk. In our previous example you funded your account with $5,000, but you only risked $1,000.
Therefore you need to define first how much you are willing to risk, since the amount you can make is a function of that risk.
What to expect when trading a system.
Trading a system does NOT mean having an ATM on your computer desk. Although I even wish that were true! To make money online trading, you need to treat it as a business first. The cash flow will come if you work it correctly.
You will be surprised to find out that there will be months when your trading system is over performing, making more money than your expected, and there are months when your trading system is lagging and draining your account. Don’t assume you’ll get a that your broker will deposit a big fat check into your account every month like your employer does every month. The risk is on you. Remember the more you risk, the more you can make or loose.
The next step is finding a market that’s suitable for you.
Selecting a market
You can trade stocks, forex and futures.
Depending on your account size “stocks” might not be an option for you, since you need at least $25,000 in your account to daytrade stocks.
Forex trading is very popular, but if you are new to trading I must warn you:
Many people have found out the hard way that Forex markets are extremely volatile, and you can easily make (or lose) thousands of dollars in a day. Most Forex brokers offer “free quotes and charts” and “no commissions”, but remember that that nothing is for free: You are paying a spread, i.e. you can NOT buy a currency and immediately sell it for the same amount. It’s like at the exchange booths that you know from vacationing over seas: You exchange $100 into 80 Euro, but when you change the 80 Euro back into dollars, you only receive $96. You loose $4 right out of the gates! Now who is the smart one here? Brokers never lose. Well, I take that back. They will always lose your money. It’s time to fight back and make them on the losing end.
The principle applies when trading Forex: You are paying at least 2 “pips”. This amounts approx. $20, depending on the currency pair you’re trading. Another disadvantage of Forex trading is that you are NOT trading at an exchange: There is no “Foreign Exchange”. You are trading against your broker: If you are selling, then your broker is buying from you and vice versa. And that’s why your broker is giving you the quotes for free: The broker can basically give you any quote since there are no regulations. If most people knew the truth about FOREX, they would run as far as away as possible from day trading FOREX.
Make Money Online Trading Futures:
They are highly leveraged, since you can trade the whole index worth $66,500 with an account as small as $500. So you can achieve an enormous leverage of 130:1. There are many advantages, especially if you’re trading the index futures:
Futures markets are regulated and you pay very low commissions.
Index Futures are traded electronically and you can enter the orders through your computer, without ever calling a broker.
You are getting very low commissions. That’s important to keep your costs down and increase your bottom line.
You have a high leverage of up to 130:1.
You are trading some of the most liquid and popular markets in the world, hence you will experience little or no slippage.
Depending on your broker you might get quotes and charts for free.
My recommendation:
If you are brand new to day trading I strongly recommend starting with the futures markets. It’s way easier than you might think, and if you follow this guide then you’ll have no problem getting started in futures trading.
Selecting a time frame
Smaller timeframes mean smaller profits, but usually smaller risk, too. When you are starting with a small trading account, then you might want to select a small timeframe to make sure that you are not overleveraging your account.
When you select a smaller timeframe (less than 60 min) your average profit per trade is usually relatively low. On the other hand you get more trading opportunities. When trading on a larger timeframe your profit per trade will be bigger, but you will have fewer trading opportunities.
Many profitable trading systems use larger time frames like daily and weekly. These systems work, too, but be prepared for less trading action and huge draw downs. Most traders cannot stomach these huge draw downs.
My recommendation:
I highly recommend that you stick to a small time frames like 60min and below. Additionally you should never hold any positions overnight.
Selecting a trading style
There are 2 distinct trading styles:
Trend-following
When prices are moving up, you buy, and when prices are going down, you sell.
Counter Trend Trading
The most common indicators that you will find in your charting software belong to one of these two categories: Over bought or over sold. You have either indicator for identifying trends (e.g. Moving Averages) or indicators that define overbought or oversold situations and therefore offer you a trade setup for a short term swing trade. Most traders use indicators. They are only as good as the trader and should never be completely trusted since most indicators lag.
When prices are trading at an extreme (e.g. upper band of a channel), you sell, and you try to catch the small move while prices are moving back into normalcy. The same applies for selling.
So don’t become confused by all the indicators and trading approaches that are out there. Make sure you understand what the indicator is measuring and what category it belongs to.
In my opinion counter trend trading is actually one of the best trading styles for the beginning trader to try out. By contrast, trend trading offers greater profit potential if a trader is able to catch a major market trend of weeks or months. Very few traders have sufficient discipline to hold a position for that period of time without getting distracted.
Detailing Your Trading Plan
By now you know how much money you want to make, how much you are willing to risk, what market you are going to trade in which timeframe, and what trading style you’ll use. In this section you will learn how to detail your plan by adding specific rules for entries and exits.
Entry Rules
Entering the market is easy.
You can enter the market based on certain conditions that your system has pre defined.
You can enter at a certain time. However, do not base your decisions at market open since it is always unpredictable.
Exit Rules
Lets keep it simple here, too: There are two different exit rules you want to apply:
Stop Loss Rules to protect your capital and
Profit Taking Exits to realize your profits
Both exit rules can be expressed in four ways:
A fixed dollar amount
A percentage of the current price
A percentage of the volatility (e.g. 50% of the average daily movement) or
A time stop (e.g. exit after 15 minutes)
A time stop gets you out of a trade if it is not moving in any direction, therefore freeing your capital for other trades.
Additional Thoughts
Entry and Exit Rules are the basic elements of your trading plan, and if you have a rather small account then that’s all you need to get started.
Money Management
When do you increase the contract size?
How much money are you going to risk per trade?
How many contracts will you trade with ONE day trading strategy?
