Trading Plan

INTRODUCED BY CENTURY FINANCIAL BROKERSDUBAI

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Investment strategies: Creating a trading plan

A good trading plan evolves and changesWhen you first start investing, it’s 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.

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 a�ecting 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 conflicting 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, it’s important to be honest with yourself and to note them all down.

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

What fundamentals are currently a�ecting this instrument?

Even if you are a technical analyst, fundamental information should still have some bearing on your decisions. It’s 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 product’s price to gain a greater understanding on the recent releases?

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 Ex-Dividend dates etc. Most firms will give advanced notice of financial announcements but some news flow will come out without warning.

It is equally important to be aware of some of the biggest economic figures due out across the world, from Inflation figures and Interest rates to Non-Farm Payrolls and employment figures. These economic announcements can have a huge impact on current open positions and it’s 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 significant support or resistance level (significant 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 difficult 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?

It’s 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 profit orders appropriately.

Once a stop loss level has been selected, often a few percentage points away from a significant 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.

Have you checked your favourite technical indicators? Are there any conflicting signals?

it’s 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 significant price levels.

The more technical evidence you have, the more confident you will feel about your position. Conflicting signals are a business risk and should have an impact on the size.

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 significant level that has remained intact, to back your view.

For example, if you’re 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.

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.

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.

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 financing and more margin is recommended (this can help to keep financing costs down). For shorter term trades, less than one week for example, making use of greater financing can be useful as it leaves you more free equity to capitalise on the longer term, higher margin positions.

Putting it all together: An example of a trading plan Name of product: US30

Date: 2/12/XX

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 figures 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 I’m relatively happy with the rest of the set up.

What fundamentals are currently a�ecting 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 firms having reported big figures already this afternoon.

Are there future fundamental risks due in your time horizon? What are they and when are they due?

There are 6 other major firm 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 conflicting signals?

The 55 period SMA seems to be providing support. As the US30 is trending, I’m 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?

I’m risking 5% of my total trading capital on this trade, if I get stopped out. I am happy with this amount.

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?

I’m planning on committing 20% of my available balance as margin to cover my position, this still leaves me additional funds for other opportunities.

The information is not to be regarded as an o er, a solicitation or an invitation to deal in any investment product or an advice or a recommendation with respect to any investment product, and does not have regard to the speci c investment objectives, nancial situation and particular needs of any speci c person.

CFB does not warrant the accuracy, completeness, suitability, currency or reliability of the Information. CFB accepts no liability for loss whatsoever arising from or in connection with the use of or reliance on the information. It should not be assumed that any product evaluation or analysis techniques presented herein, if relied upon, will guarantee pro ts or gains or will not lead to losses. Any graph, chart or any device set out or referred to herein / presentation possesses inherent limitations and practical di culties with respect to its use, and cannot, in and of itself, be used to assist any person to determine and/or to decide which investment product to buy or sell, or when to buy or sell them. Past performance is not necessarily indicative of future performance, result or trend.

CFB does not and shall not be deemed, and accepts no obligation, to provide advice or recommendation of any sort in relation to any investment product. CFB may or may have expressed views di erent from the Information and all views expressed are subject to change without notice. CFB reserves the right to act upon or use the Information at any time, including before its publication herein.

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