The New W. D. Gann Technical Review

Neil A Costa
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"The Development of a Market Master - Part 4"

If You Fail to Plan, You Plan to Fail

No sensible person would attempt to build a house, or run a business, without a plan. Trading is a serious business, yet many traders try and succeed by flying by the seat of their pants.

When traders seek my assistance, the first thing I ask for is a copy of their written trading plan. Sadly, few of those who are having real problems with their trading have such a plan.

The production of a well-documented trading plan forces one to consider the key factors that will affect our trading. By considering these factors, and documenting our response to them, we are, in effect, clarifying our thoughts about trading in a systematic way. Indeed, a good plan will start from the general and lead to the specific.

The Structure of a Trading Plan

There are no 'correct' headings that must be used in a trading plan, but if you use the following, you will have a comprehensive plan that will guide your trading, and hopefully lead to consistent, and increasing, profits.

Trading Philosophy

Don't roll your eyes and sigh! This heading is an important starting point.

Document under this heading your philosophy of markets and trading.

Many traders have real trouble working out the time frame in which they wish to trade. On the one hand, they want to trade the longer-term moves, yet at the same time they use very tight stops. The two are incompatible, and will leave them with small losses as they watch the big, profitable moves take off without them.

Some traders have fears about overnight gaps in markets. If this is a real fear for you, your philosophy of markets and trading may well be that it is dangerous to hold a position overnight. If this is your genuine belief, it should have a profound impact on the type of trader you should be if you are to sleep at night. In fact, it may mean that only intra-day trading is for you.

My trading philosophy is almost the opposite of this. It is my belief that markets, from time to time, make large moves, and that the big money is to be made trading the big moves. This belief came from studying the price action of stock and commodity markets over a long period of time, and by accepting that, as long as I trade with the trend, overnight gaps will, on balance, make me money. I am in good company, as W.D. Gann and Jesse Livermore, two of the greatest traders of all time, shared this philosophy.

Your trading philosophy is a very personal thing. The important thing is that you clarify your philosophy in your own mind, and that you document it.

Trading Aims

Every trader has a reason, or reasons, for trading. Your trading aim(s) should, first and foremost, relate to your reason(s) for trading.

In considering your trading aims, you should take into account factors such as:

• your age;
• the extent to which you can tolerate risk;
• how much money you have available for trading;
• any income you have available from other sources;
• your cash needs; and
• the taxation implications of your trading.

My number one trading aim is to maximise my trading returns, given the prevailing market conditions. I accept that this is a little vague, however if I am to maximise my return on my capital, I have to be flexible in how I do this. I therefore consider the following, acknowledging my strong preference for stock market trading:

• Which of the traditional investment areas are generating the highest returns at the moment - the stock market, the property market, or fixed interest? (I accept that at times gems, coins and other investment vehicles offer spectacular returns, however I do not consider these to be vehicles for my core investment activities, as they are specialist areas, and are best traded by those who have greater expertise in these areas than I do.)

• Assuming that the stock market is giving appropriate signals according to my proven trading system, I have a strong preference to trade stocks. I understand that, as an alternative, I can place my investment dollars with a stock market investment fund, so a further aim of mine is to outperform these funds by a reasonable margin. I also understand that some funds fail to outperform the Australian All Ordinaries Index, so I also aim to outperform the Index. This is not difficult to do, because I have a number of advantages over these funds:

• My overheads are low;
• I can enter and exit the market more swiftly;
• I can spread my risk over a smaller number of stronger stocks, due to my trading capital being smaller than that of a large fund; and
• I do not have to be in the market at all, when the profit-making opportunities are not there.

Given the above reasons for my investing in the stock market, and given my stock market trading philosophy, I therefore look for stock market trades that allow me to trade with a minimum of risk. I also look for trades that have the potential to generate excellent profits.

Trading Strategies

Your trading strategies are your specific rules for trading, which must flow logically from your trading philosophy and aims. If you trade several market setups, document each of these individually, in such detail that a reasonably experienced trader could take your documentation and check your trades to see if you are, in fact, trading according to your rules.

Records to be Maintained

This may seem a very mundane topic, yet good record keeping is essential! Keep current, comprehensive records of each trade you make. By keeping such records, you will then be in an excellent position to ensure that:

• there are no errors in any paper work you receive from your broker;
• you have been charged the correct brokerage and fees;
• you have accurate information for taxation purposes; and most importantly,
• your overall position can be monitored at any time.

Remember to file all of the 'official' pieces of paper that you receive from your broker. They all serve a purpose.

Evaluation Plan

It is vitally important that you review your achievements as a trader on a regular basis. This is done for a number of reasons. These include:

• the monitoring of your profitability over time; and
• the analysis of how closely you are following your trading rules.

Monitoring Your Profitability

We monitor our profitability on a regular basis as this is, after all, a money making exercise. You may consider plotting on a simple line chart each week (or month, depending on how frequently you trade), your trading equity (the profit/loss of your open trades, plus the money in your trading account). This will allow you to monitor your progress in a most graphic manner, and to quickly isolate problem areas in your trading.

Monitoring Your Implementation of the Rules

Monitoring our performance in the implementation of our trading rules is probably the secret to achieving constant improvement as a trader. From my experience, however, it is an exercise that is often not undertaken, or if it is, it is not taken anywhere near as seriously as it ought to be.

If you are to improve your performance as a trader, you must identify the areas where you are not performing to your maximum potential. For example, you may be risking too much of your capital on any one trade, or you may find yourself consistently failing to take sell signals at the time they are given. If you know where your weaknesses lie, you can work towards overcoming these weaknesses.

There are a number of reasons why people do not take this all-important evaluation phase seriously. An obvious reason is that it is not an exciting activity - people prefer to think about their next trade, rather than focus on how they can become a better trader.

Another common reason people do not undertake this evaluation is that they know, in their hearts, that their performance is below par, and they feel more secure in not knowing the exact truth. This is similar to the trader who owns a stock that should have been sold some time ago, but who no longer looks up the price in the newspaper!

The key to you being successful in any field is for you to identify your weaknesses, and then turn these weaknesses into strengths. We must avoid the temptation of focusing only on our strengths, or on what we enjoy doing most. You also must also be prepared to take full responsibility for your own actions!

Professional Development Plan

As a professional trader, you should continue your trading and investment education. This need not be an expensive process, but it is an important process.

Inexpensive, yet effective, means of increasing your knowledge include reading relevant books and magazines, visiting informative Internet sites, listening to audio tapes, viewing videotapes, and joining a relevant professional association. The key is to look for quality information from highly credible sources, and to avoid the large amount of badly researched or opinionated material that is readily available.

Investment and trading books can be purchased through local bookshops, on the Internet, by mail order, or in some cases, borrowed from a library. Good quality investment and trading magazines can be purchased by subscription. In Australia, these include Shares and Personal Investment and internationally, Technical Analysis of Stocks and Commodities Magazine, and Futures Magazine.

The Internet is a cheap and effective source of information, including articles on an almost infinite range of topics. It is an excellent source of end-of-day data, and even live quotes. The Internet is also a means through which stocks, options and futures can be bought and sold.

There are not many good audio tapes readily available on trading. This is a little surprising, given the widespread availability of high-quality audio-tape programs on a wide range of personal development topics.

There are high-quality videotapes available on investment and trading. These can be expensive, however.

Finally, consider attending the occasional trading seminar, or even retaining someone to coach you over a period of time. The cost of a good seminar can be minute compared with the value that can often be gained. Similarly, just as the highest paid sportspeople in the world would never dream of competing without the guiding hand of a professional coach, many traders find that a coach can assist them in their development, and can help them to stay focused.

Your professional development is an ongoing process. It should be planned and undertaken conscientiously. The good news is that legitimate expenditure in this area should be able to be deducted from your income taxation.

Conclusion

If you have not documented your trading plan, please do so. As you do so, you will be forced to think through critical issues that will ultimately impinge on your trading success.

Once completed, you will have in front of you your business plan for trading. It will be the rudder that guides your trading in times of uncertainty. It is also the yardstick by which you can measure your success, or otherwise, as a trader. Without it, improvement will be very difficult as you have no means of judging what you are doing wrong (or right)!

[This article is based on an article published in the Australian Technical Analysts' Association Journal, September/October 1999.]

DISCLAIMER:

Every effort has been made to ensure that the content and conclusions presented in The New W. D. Gann Technical Review are complete and accurate.

No part of The New W. D. Gann Technical Review contains trading advice - stated or implied, nor is an invitation to trade. The directors and associates of Lambert-Gann Educators, Inc. are NOT licensed trading or investment advisors. Lambert-Gann Educators, Inc. is an organization designed to assist traders and investors to become more knowledgeable and independent.

The giving of advice is therefore contrary to the very objectives of Lambert-Gann Educators, Inc.

Traders requiring trading or investment advice should contact a licensed advisor.
Stockbrokers and futures brokers are licensed advisors.

Neither Lambert-Gann Educators, Inc., nor anyone else involved in the production of The New W. D. Gann Technical Review, will be liable for any liability, loss or damage directly or indirectly caused, or believed to be caused, by The New W. D. Gann Technical Review.

Traders, to be successful, must take full responsibility for their own actions.

With respect to trading results, past performance is not necessarily an indication of future performance.

By maintaining your subscription to The New W. D. Gann Technical Review, you acknowledge that you understand and accept the contents of this disclaimer.

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