Trading As A Business
The idea of trading for a living - or having your own trading business - is appealing to many people: you get to be your own boss, set your own schedule and work from home while enjoying virtually unlimited income potential. In addition to these factors, anyone with a computer, Internet connection and a small trading account can give it a try. Unlike many other jobs, no degrees, special training or experience is required.
Steep Learning Curve
Because trading is so easy to get into, new traders may not realize there's a very steep learning curve involved: being successful is difficult, and it takes a lot of time and effort. Here are some quick facts about trading:
About 90% of day traders fail within the first year
There is no way to completely eliminate risk in trading
There is no trading system that wins 100% of the time
You will always have losing trades, even if you are a rock star trader
You need money to make money – it will take a long time to get rich with a small trading account
Successful independent traders can earn a comfortable income, but most do not become millionaires
The ease with which you can start trading (just open a trading account and hit the “buy” button) in no way implies that becoming a successful and profitable trader is easy. Many of the 90% of traders who fail within the first year do so because they start trading without having developed any type of logical business or trading plan. Any business entered into with such a lack of planning is likely to fail. Another common reason for failure is that the trader is undercapitalized; meaning, they don't have enough money to take on the risk and absorb the inevitable losses.
No Easy Button
There is also a lot of deception associated with learning the business of trading. Late night infomercials and hundreds of websites would have you believe that trading is easy and that anyone can generate a huge and consistent income from the financial markets, with little or no effort. While there may be the rare case where a trader manages to make a huge amount of money in a short time, that's not the norm. For most people, trading involves a lot of hard work before becoming successful.
As a business, trading requires constant research, evaluation and discipline. There are no guarantees in the trading business, and you could work a 40-hour week and end up losing money. Anyone considering trading should make sure they have both the personality and financial means to take on this type of business activity.
You might ask yourself:
Am I driven to succeed?
How do I handle losing?
Do I have time to dedicate to learning the business of trading?
Can I stick to a plan?
Do I have my family’s support?
Do I have money that I can afford to lose?
How do I deal with stress?
Do I have realistic expectations?
If you want to become a part-time or full-time trader, it's important that you take the time to research and plan your trading business; these are essential steps in your overall success as a trader. This is not a profession at which you will become skilled overnight. Traders who start putting their money in the market too soon or without a well-researched trading plan often find themselves back at the beginning, but with a lot less trading capital. Traders who have realistic expectations and who treat trading as a business – and not as a hobby or a get-rich-quick scheme – are more likely to beat the odds and become part of the group of traders who succeed.
Trading Technology
Two keys to successful trading include taking a business-like approach (complete with a business and trading plan) and effectively using your available trading technology. The Trading Plan Development section of this tutorial introduces how to make a trading plan; in this section, we'll take a look at the various technology traders use.
Not That Long Ago …
Not long ago, you would have had to pick up the phone and call your broker to place an order. The broker would have called the order in to a floor trader who was physically at the exchange. The floor broker would find a match for the trade, and by the time your order was filled, the price could have changed dramatically. Not that you would have known…you probably wouldn't have had access to a live data feed.
Technology Today
Today, however, the technology that was once reserved for the exchanges and institutional traders is readily available to retail traders: faster computers, all-electronic markets and direct-access trading have all helped level the playing field for the independent retail trader. Additional advancements such as trade automation, innovative market research tools, sophisticated testing platforms and apps have given traders even more technology to work with. To get started trading, you'll need a computer, a reliable high-speed Internet connection and trading software.
Computers
A computer is your primary tool. This is where the action takes place and where you will research, test and trade your plan. In a perfect world, your trading computer would be used for one thing: trading. The reality, however, is that most computers have various applications running and are used for things like gaming and Internet surfing.
That said, if you must use your trading computer for pursuits beyond trading, be sure it is adequately protected with anti-virus software. Many companies offer free or trial versions of their virus protection software (keep in mind, though, that free versions don't always run scans automatically). Regardless of the software that you select, the key is to install it, update it often and perform regular scans to keep your computer healthy.
SpecOut | Graphiq
Your computer should have the fastest processor and the maximum amount of memory that you can reasonably afford (the shorter-term your style of trading, the more important this becomes). If at all possible, your computer should be capable of supporting multiple monitors. Trading with two (or more) monitors gives you the “real estate” you need to view multiple markets and trading charts, while having a dedicated order entry window. This can improve your situational awareness and allow for more precision in your trading.
SpecOut | Graphiq
You should also have a phone that works even if you lose power - such as a fully-charged cell phone. That way, you'll be able to call in an order to your broker if you've lost power. Keep your broker’s trading desk phone number in your contacts and have your account information handy.
It's also a good idea to have a back-up battery for your computer – an uninterruptible power supply (UPS). Think about how long you would need to keep your computer and other essential equipment running to properly manage and/or close out trades in the event of a power loss, and shop for a UPS based on that criteria, as well as the number of inputs you will need.
It's worth noting that, depending on the type of trading you're doing, you may be able to research, execute and manage trades from your mobile device or tablet. Most trading platforms today offer robust mobile interfaces, in addition to their web-based on downloadable software. Even if you don't make your mobile device your primary trading machine, it's a good idea to have your platform's mobile app loaded - just in case you need it while you're traveling or if your main computer crashes.
The TradeStation mobile platform has advanced charting and order entry capabilities.
Internet Connection
In fast-moving markets, it's definitely to your advantage to have a fast, reliable Internet connection so your trade orders are submitted and filled as quickly as possible. While most retail traders can't complete with institutional traders in terms of execution speed, a lag time of just one or two seconds can still mean the difference between a winning and losing trade. Depending on where you live, you may be able to pay a higher rate to your Internet Service Provider (ISP) to get faster speeds. In general, if you're doing anything faster than position trading, it's worth the added expense to have a faster connection.
Trading Software
Trading software serves three main purposes:
Market analysis
Testing
Order execution
The market analysis component of trading software is what allows you to view and customize price charts and display price quotes. Depending on your style of trading, you'll need end-of-day market analysis (with delayed quotes) or real-time quotes that instantly update as market conditions change. Longer-term traders (position and some swing traders) may be able to use the EOD data; shorter-term traders (some swing, and all day and scalp traders) will need access to real-time data.
The next component is the software’s backtesting application. Not that many years ago, the ability to backtest at all was a fairly advanced feature of trading software. Today, however, traders can not only backtest, but also perform multivariable optimizations and walkforward optimizations/testing. These tools can greatly improve your ability to accurately test a trading system.
Lastly, your trading software will have at least one order entry interface. Some trading software offers very basic order entry, while others support advanced and even customizable interfaces. Many platforms support various levels of trade automation, from conditional orders to fully automated strategies.
Many trading platforms – the software that provides the market analysis, testing and trade entry capabilities – provide a simulated environment where you can practice taking trades and try out trading ideas. These “sim” accounts provide valuable experience for new traders, but it's important to remember that sim trading and live trading are different animals.
Sim trading, for example, often generates order fills that would never happen in live trading (giving you a false sense of profitability in many cases), and the emotions involved in sim trading can never be relied upon to represent how you will feel and act in live trading. That said, sim trading is an excellent way for traders to gain experience in the markets and with actual order entry placement.
While some trading software is sold as a complete package, most is leased on a monthly basis (from your broker, for example). In some cases, the monthly fee is waived if you trade a specific volume (e.g., 10 round-trip trades per month). It is important to note that in addition to any software/platform fees, you may also have to pay for certain data feeds, such as quotes from specific exchanges. These fees differ depending on your status as a trader: in general, the fees are relatively low for individual traders, but can be quite high if you are considered a “professional” trader.
Apps
Today, there are apps for everything, and trading is no exception - whether you're looking for market-moving news, real-time price charts or technical analysis. Apps let you stay on top of the market when you're not in front of your computer. Some broker/platforms, such as TradeStation, have libraries of apps from third-party vendors that integrate directly with the platform to enhance its capabilities. Most apps, however, can be downloaded directly to your smart phone or tablet. Some noteworthy apps include:
MarketSmith - free technical and fundamental stock data, such as earnings and sales history, proprietary ratings and rankings, performance reports and charts
Stocks Live - paid ($9.99) app that allows you to sync and trade your portfolios with major brokers, real-time quotes, global news coverage, watch lists, and scans
Stocks Tracker - free streaming live quotes, pre-market/after-hour quotes, portfolio monitoring, market news, economic calendar and full-screen charts
StockTwits - free market insights, updates, sentiment and analysis from thousands of real investors and traders
Brokers and Trading Accounts
Brokers are an essential partner in the trading business and allow you to interact with the markets. As a retail trader, you can't buy and sell directly at the exchanges, so you have to work with a broker, which acts as an intermediary. Choosing a broker requires a bit of time and research, and you may want to consider factors such as:
Do they provide their own order execution software and is there a platform fee?
Do they service markets that you want to trade (i.e., stocks, futures or forex)?
Do they support simulated trading?
How do they handle order execution?
How efficient is their customer service?
What are their commissions and fees, including “hidden charges?”
What are their hold times when calling?
What are their margin requirements?
What type of data feed do they provide?
Once you have decided on a broker, you will be able to open and if desired, fund, a trading account.
Trading Plan Development
Before starting your trading plan template, it's important to note the difference between discretionary and system traders. Traders typically fall into one of two broad categories: discretionary traders (or decision-based traders) who watch the markets and place manual trades in response to information that is available at that time, and system traders (or rules-based traders) who often use some level of trade automation to implement an objective set of trading rules.
Because it is often viewed as easier to jump into trading as a discretionary trader, that’s where most traders start, relying on a combination of knowledge and intuition to find high-probability trading opportunities. Even if a discretionary trader uses a specific trading plan, he or she still decides whether or not to actually place each trade. For example, a discretionary trader’s chart may show that all criteria have been met for a long trade, but they may skip the trade if the markets have been too choppy that trading session or they know a Fed report is coming up.
Systems traders, on the other hand, follow the trading system’s logic exactly. Because system trading is based on an absolute set of rules, this type of trading is well-suited to partial or full-trade automation. For example, a system can be coded using your trading platform’s proprietary language, and once the strategy is “turned on” the computer handles all the trading activity, including identifying trades, placing orders and managing exits.
While discretionary traders may mix some degree of intuition into their trading plans, system traders use an entirely objective trading plan that takes the guesswork out of trading and (ideally) provides consistency over time. In this section, we'll discuss how to develop a trading plan; the next section, Testing Your Trading Plan, introduces the various methods used for testing the viability of a trading plan.
Your trading plan is a written set of rules that defines how and when you will place trades. It includes the following components:
Market(s) That Will Be Traded
Traders aren't limited to stocks. You have a wide selection of instruments to choose from, including bonds, commodities, exchange traded funds (ETFs), forex (FX), futures, option and the popular e-mini futures contracts (such as the e-mini S&P 500 futures contract). Any instrument you choose for trading must trade under good liquidity and volatility so you'll have opportunities to profit.
Liquidity describes the ability to execute orders of any size quickly and efficiently without causing a significant change in price. In simple terms, liquidity refers to the ease with which shares (or contracts) can be bought and sold. Liquidity can be measured in terms of:
Width – How tight is the bid/ask spread?
Depth – How deep is the market (how many orders are resting beyond the best bid and best offer)?
Immediacy – How quickly can a large market order be executed?
Resiliency – How long does it take the market to bounce back after a large order is filled?
Markets with good liquidity tend to trade with tight bid/ask spreads and with enough market depth to fill orders quickly. Liquidity is important to traders because it helps ensure that orders will be:
Filled
Filled with minimal slippage
Filled without substantially affecting price
Volatility, on the other hand, measures the amount and speed at which price moves up and down in a particular market. When a trading instrument experiences volatility, it provides opportunities for traders to profit from the change in price. Any change in price – whether rising or falling – creates an opportunity to profit. Keep in mind, it's impossible to make a profit if price stays the same.
It's important to note that a trading plan developed and tested for the e-minis, for example, will not necessarily perform well when applied to stocks. You may need a separate trading plan for each instrument or type of instrument that you trade (one trading plan, for example, may perform well on a variety of the e-minis). Many traders find it helpful to focus initially on one trading instrument and then add other instruments as their trading skills - and trading trading account - increase.
The Primary Chart Interval You'll Use to Make Trading Decisions
Chart intervals are often associated with a particular trading style. They can be based on time, volume or activity, and the one you choose ultimately comes down to personal preference and what makes the most sense to you. That said, it's common for longer-term traders to look at longer-period charts; conversely, short-term traders typically use intervals with smaller periods. For example, a swing trader may use a 60-minute chart while a scalper may prefer a 144-tick chart.
Keep in mind that price activity is the same no matter what chart you choose, and the various charting intervals simply provide different views of the markets. While you may choose to incorporate multiple charting intervals in your trading, your primary charting interval will be the one you use to define specific trade entry and exit rules.
Indicators and Settings You'll Apply to the Chart
Your trading plan must also define any indicators that will be applied to your chart(s). Technical indicators are mathematical calculations based on a trading instrument’s past and current price and/or volume activity. It should be noted that indicators alone don't provide buy and sell signals; you must interpret the signals to find trade entry and exit points that conform to your trading style. Various types of indicators can be used, including those that interpret trend, momentum, volatility and volume.
In addition to specifying technical indicators, your trading plan should also define the settings that will be used. If you plan on using a moving average, for example, your trading plan should specify a “20-day simple moving average” or a “50-day exponential moving average.”
Rules for Position Sizing
Position sizing refers to the dollar value of your trade, and can also be used to define the number of shares or contracts that you'll trade. It's very common, for example, for new traders to start with one e-mini contract. After time, and if the system proves successful, you might trade more than one contract at a time, thereby increasing your potential profits, but also maximizing potential losses. Some trading plans may call for additional contracts to be added only if a certain profit is achieved. Regardless of your position sizing strategy, the rules should be clearly stated in your trading plan.
Entry Rules
Many traders are either conservative or aggressive by nature, and this often becomes evident in their trade entry rules. Conservative traders may wait for too much confirmation before entering a trade, thereby missing out on valid trading opportunities. Overly aggressive traders, on the other hand, may be too quick to get in the market without much confirmation at all. Trade entry rules can be used by traders who are conservative, aggressive or somewhere in between to provide a consistent and decisive means of getting into the market.
Trade Filters and Triggers
Trade filters and triggers work together to create trade entry rules. Trade filters identify the setup conditions that must be met in order for a trade entry to occur. They can be thought of as the “safety” for the trade trigger; once conditions for the trade filter have been met, the safety is off and the trigger becomes active. A trade trigger is the line in the sand that defines when a trade will be entered. Trade triggers can be based on a number of conditions, from indicator values to the crossing of a price threshold. Here’s an example:
Trade filters:
Time is between 9:30 AM and 3:00 PM EST
A price bar on a 5-minute chart has closed above the 20-day simple moving average
The 20-day simple moving average is above the 50-day simple moving average
Once these conditions have been met, we can look for the trade trigger:
Enter a long position with a stop limit order set for one tick above the previous bar’s high
Note how the trigger specifies the order type that will be used to execute the trade. Because the order type determines how the trade is executed (and therefore filled), it is important to understand the proper use of each order type; the order type should be part of your trading plan. Review the Order Types section of this tutorial, or see Introduction to Order Types for more in-depth coverage.
Exit Rules
It's said that you can enter a trade at any price level and make a profit by exiting at the right time. While this seems overly simplistic, it's pretty accurate. Trade exits are a critical aspect of a trading plan since they ultimately define the success of a trade. As such, your exit rules require the same amount of research and testing as your entry rules. Exit rules define a variety of trade outcomes and can include:
Profit targets
Stop loss levels
Trailing stop levels
Stop and reverse strategies
Time exits (such as EOD – end of day)
As with trade entry rules, the type of exit orders that you use should be clearly stated in your trading plan. For example:
Profit target: Exit with a limit order set 20 ticks above the entry fill price
Stop loss: Exit with a stop order set 10 ticks below the entry fill price
Note: If you set this up as an bracket order (OCO order), once one order gets filled (either the profit target or the stop loss), the other order will automatically be canceled. If you place the orders manually, remember to cancel the remaining one to avoid an unwanted position.
Getting Ready for Testing
When developing your trading plan, remember to include all of the important elements:
Trading instrument(s)
Time frames
Position sizing
Entry conditions (including filters and triggers)
Exit rules (including profit target, stop loss and money management)
Keep in mind, writing down your trading plan is only the first step in a lengthy process. At this stage, it's still just an idea - or a template for the final product. You'll have to thoroughly test your plan before putting it in the market. In the next section, we'll show you how.
Source : https://www.investopedia.com/university/how-start-trading/
The idea of trading for a living - or having your own trading business - is appealing to many people: you get to be your own boss, set your own schedule and work from home while enjoying virtually unlimited income potential. In addition to these factors, anyone with a computer, Internet connection and a small trading account can give it a try. Unlike many other jobs, no degrees, special training or experience is required.
Steep Learning Curve
Because trading is so easy to get into, new traders may not realize there's a very steep learning curve involved: being successful is difficult, and it takes a lot of time and effort. Here are some quick facts about trading:
About 90% of day traders fail within the first year
There is no way to completely eliminate risk in trading
There is no trading system that wins 100% of the time
You will always have losing trades, even if you are a rock star trader
You need money to make money – it will take a long time to get rich with a small trading account
Successful independent traders can earn a comfortable income, but most do not become millionaires
The ease with which you can start trading (just open a trading account and hit the “buy” button) in no way implies that becoming a successful and profitable trader is easy. Many of the 90% of traders who fail within the first year do so because they start trading without having developed any type of logical business or trading plan. Any business entered into with such a lack of planning is likely to fail. Another common reason for failure is that the trader is undercapitalized; meaning, they don't have enough money to take on the risk and absorb the inevitable losses.
No Easy Button
There is also a lot of deception associated with learning the business of trading. Late night infomercials and hundreds of websites would have you believe that trading is easy and that anyone can generate a huge and consistent income from the financial markets, with little or no effort. While there may be the rare case where a trader manages to make a huge amount of money in a short time, that's not the norm. For most people, trading involves a lot of hard work before becoming successful.
As a business, trading requires constant research, evaluation and discipline. There are no guarantees in the trading business, and you could work a 40-hour week and end up losing money. Anyone considering trading should make sure they have both the personality and financial means to take on this type of business activity.
You might ask yourself:
Am I driven to succeed?
How do I handle losing?
Do I have time to dedicate to learning the business of trading?
Can I stick to a plan?
Do I have my family’s support?
Do I have money that I can afford to lose?
How do I deal with stress?
Do I have realistic expectations?
If you want to become a part-time or full-time trader, it's important that you take the time to research and plan your trading business; these are essential steps in your overall success as a trader. This is not a profession at which you will become skilled overnight. Traders who start putting their money in the market too soon or without a well-researched trading plan often find themselves back at the beginning, but with a lot less trading capital. Traders who have realistic expectations and who treat trading as a business – and not as a hobby or a get-rich-quick scheme – are more likely to beat the odds and become part of the group of traders who succeed.
Trading Technology
Two keys to successful trading include taking a business-like approach (complete with a business and trading plan) and effectively using your available trading technology. The Trading Plan Development section of this tutorial introduces how to make a trading plan; in this section, we'll take a look at the various technology traders use.
Not That Long Ago …
Not long ago, you would have had to pick up the phone and call your broker to place an order. The broker would have called the order in to a floor trader who was physically at the exchange. The floor broker would find a match for the trade, and by the time your order was filled, the price could have changed dramatically. Not that you would have known…you probably wouldn't have had access to a live data feed.
Technology Today
Today, however, the technology that was once reserved for the exchanges and institutional traders is readily available to retail traders: faster computers, all-electronic markets and direct-access trading have all helped level the playing field for the independent retail trader. Additional advancements such as trade automation, innovative market research tools, sophisticated testing platforms and apps have given traders even more technology to work with. To get started trading, you'll need a computer, a reliable high-speed Internet connection and trading software.
Computers
A computer is your primary tool. This is where the action takes place and where you will research, test and trade your plan. In a perfect world, your trading computer would be used for one thing: trading. The reality, however, is that most computers have various applications running and are used for things like gaming and Internet surfing.
That said, if you must use your trading computer for pursuits beyond trading, be sure it is adequately protected with anti-virus software. Many companies offer free or trial versions of their virus protection software (keep in mind, though, that free versions don't always run scans automatically). Regardless of the software that you select, the key is to install it, update it often and perform regular scans to keep your computer healthy.
SpecOut | Graphiq
Your computer should have the fastest processor and the maximum amount of memory that you can reasonably afford (the shorter-term your style of trading, the more important this becomes). If at all possible, your computer should be capable of supporting multiple monitors. Trading with two (or more) monitors gives you the “real estate” you need to view multiple markets and trading charts, while having a dedicated order entry window. This can improve your situational awareness and allow for more precision in your trading.
SpecOut | Graphiq
You should also have a phone that works even if you lose power - such as a fully-charged cell phone. That way, you'll be able to call in an order to your broker if you've lost power. Keep your broker’s trading desk phone number in your contacts and have your account information handy.
It's also a good idea to have a back-up battery for your computer – an uninterruptible power supply (UPS). Think about how long you would need to keep your computer and other essential equipment running to properly manage and/or close out trades in the event of a power loss, and shop for a UPS based on that criteria, as well as the number of inputs you will need.
It's worth noting that, depending on the type of trading you're doing, you may be able to research, execute and manage trades from your mobile device or tablet. Most trading platforms today offer robust mobile interfaces, in addition to their web-based on downloadable software. Even if you don't make your mobile device your primary trading machine, it's a good idea to have your platform's mobile app loaded - just in case you need it while you're traveling or if your main computer crashes.
The TradeStation mobile platform has advanced charting and order entry capabilities.
Internet Connection
In fast-moving markets, it's definitely to your advantage to have a fast, reliable Internet connection so your trade orders are submitted and filled as quickly as possible. While most retail traders can't complete with institutional traders in terms of execution speed, a lag time of just one or two seconds can still mean the difference between a winning and losing trade. Depending on where you live, you may be able to pay a higher rate to your Internet Service Provider (ISP) to get faster speeds. In general, if you're doing anything faster than position trading, it's worth the added expense to have a faster connection.
Trading Software
Trading software serves three main purposes:
Market analysis
Testing
Order execution
The market analysis component of trading software is what allows you to view and customize price charts and display price quotes. Depending on your style of trading, you'll need end-of-day market analysis (with delayed quotes) or real-time quotes that instantly update as market conditions change. Longer-term traders (position and some swing traders) may be able to use the EOD data; shorter-term traders (some swing, and all day and scalp traders) will need access to real-time data.
The next component is the software’s backtesting application. Not that many years ago, the ability to backtest at all was a fairly advanced feature of trading software. Today, however, traders can not only backtest, but also perform multivariable optimizations and walkforward optimizations/testing. These tools can greatly improve your ability to accurately test a trading system.
Lastly, your trading software will have at least one order entry interface. Some trading software offers very basic order entry, while others support advanced and even customizable interfaces. Many platforms support various levels of trade automation, from conditional orders to fully automated strategies.
Many trading platforms – the software that provides the market analysis, testing and trade entry capabilities – provide a simulated environment where you can practice taking trades and try out trading ideas. These “sim” accounts provide valuable experience for new traders, but it's important to remember that sim trading and live trading are different animals.
Sim trading, for example, often generates order fills that would never happen in live trading (giving you a false sense of profitability in many cases), and the emotions involved in sim trading can never be relied upon to represent how you will feel and act in live trading. That said, sim trading is an excellent way for traders to gain experience in the markets and with actual order entry placement.
While some trading software is sold as a complete package, most is leased on a monthly basis (from your broker, for example). In some cases, the monthly fee is waived if you trade a specific volume (e.g., 10 round-trip trades per month). It is important to note that in addition to any software/platform fees, you may also have to pay for certain data feeds, such as quotes from specific exchanges. These fees differ depending on your status as a trader: in general, the fees are relatively low for individual traders, but can be quite high if you are considered a “professional” trader.
Apps
Today, there are apps for everything, and trading is no exception - whether you're looking for market-moving news, real-time price charts or technical analysis. Apps let you stay on top of the market when you're not in front of your computer. Some broker/platforms, such as TradeStation, have libraries of apps from third-party vendors that integrate directly with the platform to enhance its capabilities. Most apps, however, can be downloaded directly to your smart phone or tablet. Some noteworthy apps include:
MarketSmith - free technical and fundamental stock data, such as earnings and sales history, proprietary ratings and rankings, performance reports and charts
Stocks Live - paid ($9.99) app that allows you to sync and trade your portfolios with major brokers, real-time quotes, global news coverage, watch lists, and scans
Stocks Tracker - free streaming live quotes, pre-market/after-hour quotes, portfolio monitoring, market news, economic calendar and full-screen charts
StockTwits - free market insights, updates, sentiment and analysis from thousands of real investors and traders
Brokers and Trading Accounts
Brokers are an essential partner in the trading business and allow you to interact with the markets. As a retail trader, you can't buy and sell directly at the exchanges, so you have to work with a broker, which acts as an intermediary. Choosing a broker requires a bit of time and research, and you may want to consider factors such as:
Do they provide their own order execution software and is there a platform fee?
Do they service markets that you want to trade (i.e., stocks, futures or forex)?
Do they support simulated trading?
How do they handle order execution?
How efficient is their customer service?
What are their commissions and fees, including “hidden charges?”
What are their hold times when calling?
What are their margin requirements?
What type of data feed do they provide?
Once you have decided on a broker, you will be able to open and if desired, fund, a trading account.
Trading Plan Development
Before starting your trading plan template, it's important to note the difference between discretionary and system traders. Traders typically fall into one of two broad categories: discretionary traders (or decision-based traders) who watch the markets and place manual trades in response to information that is available at that time, and system traders (or rules-based traders) who often use some level of trade automation to implement an objective set of trading rules.
Because it is often viewed as easier to jump into trading as a discretionary trader, that’s where most traders start, relying on a combination of knowledge and intuition to find high-probability trading opportunities. Even if a discretionary trader uses a specific trading plan, he or she still decides whether or not to actually place each trade. For example, a discretionary trader’s chart may show that all criteria have been met for a long trade, but they may skip the trade if the markets have been too choppy that trading session or they know a Fed report is coming up.
Systems traders, on the other hand, follow the trading system’s logic exactly. Because system trading is based on an absolute set of rules, this type of trading is well-suited to partial or full-trade automation. For example, a system can be coded using your trading platform’s proprietary language, and once the strategy is “turned on” the computer handles all the trading activity, including identifying trades, placing orders and managing exits.
While discretionary traders may mix some degree of intuition into their trading plans, system traders use an entirely objective trading plan that takes the guesswork out of trading and (ideally) provides consistency over time. In this section, we'll discuss how to develop a trading plan; the next section, Testing Your Trading Plan, introduces the various methods used for testing the viability of a trading plan.
Your trading plan is a written set of rules that defines how and when you will place trades. It includes the following components:
Market(s) That Will Be Traded
Traders aren't limited to stocks. You have a wide selection of instruments to choose from, including bonds, commodities, exchange traded funds (ETFs), forex (FX), futures, option and the popular e-mini futures contracts (such as the e-mini S&P 500 futures contract). Any instrument you choose for trading must trade under good liquidity and volatility so you'll have opportunities to profit.
Liquidity describes the ability to execute orders of any size quickly and efficiently without causing a significant change in price. In simple terms, liquidity refers to the ease with which shares (or contracts) can be bought and sold. Liquidity can be measured in terms of:
Width – How tight is the bid/ask spread?
Depth – How deep is the market (how many orders are resting beyond the best bid and best offer)?
Immediacy – How quickly can a large market order be executed?
Resiliency – How long does it take the market to bounce back after a large order is filled?
Markets with good liquidity tend to trade with tight bid/ask spreads and with enough market depth to fill orders quickly. Liquidity is important to traders because it helps ensure that orders will be:
Filled
Filled with minimal slippage
Filled without substantially affecting price
Volatility, on the other hand, measures the amount and speed at which price moves up and down in a particular market. When a trading instrument experiences volatility, it provides opportunities for traders to profit from the change in price. Any change in price – whether rising or falling – creates an opportunity to profit. Keep in mind, it's impossible to make a profit if price stays the same.
It's important to note that a trading plan developed and tested for the e-minis, for example, will not necessarily perform well when applied to stocks. You may need a separate trading plan for each instrument or type of instrument that you trade (one trading plan, for example, may perform well on a variety of the e-minis). Many traders find it helpful to focus initially on one trading instrument and then add other instruments as their trading skills - and trading trading account - increase.
The Primary Chart Interval You'll Use to Make Trading Decisions
Chart intervals are often associated with a particular trading style. They can be based on time, volume or activity, and the one you choose ultimately comes down to personal preference and what makes the most sense to you. That said, it's common for longer-term traders to look at longer-period charts; conversely, short-term traders typically use intervals with smaller periods. For example, a swing trader may use a 60-minute chart while a scalper may prefer a 144-tick chart.
Keep in mind that price activity is the same no matter what chart you choose, and the various charting intervals simply provide different views of the markets. While you may choose to incorporate multiple charting intervals in your trading, your primary charting interval will be the one you use to define specific trade entry and exit rules.
Indicators and Settings You'll Apply to the Chart
Your trading plan must also define any indicators that will be applied to your chart(s). Technical indicators are mathematical calculations based on a trading instrument’s past and current price and/or volume activity. It should be noted that indicators alone don't provide buy and sell signals; you must interpret the signals to find trade entry and exit points that conform to your trading style. Various types of indicators can be used, including those that interpret trend, momentum, volatility and volume.
In addition to specifying technical indicators, your trading plan should also define the settings that will be used. If you plan on using a moving average, for example, your trading plan should specify a “20-day simple moving average” or a “50-day exponential moving average.”
Rules for Position Sizing
Position sizing refers to the dollar value of your trade, and can also be used to define the number of shares or contracts that you'll trade. It's very common, for example, for new traders to start with one e-mini contract. After time, and if the system proves successful, you might trade more than one contract at a time, thereby increasing your potential profits, but also maximizing potential losses. Some trading plans may call for additional contracts to be added only if a certain profit is achieved. Regardless of your position sizing strategy, the rules should be clearly stated in your trading plan.
Entry Rules
Many traders are either conservative or aggressive by nature, and this often becomes evident in their trade entry rules. Conservative traders may wait for too much confirmation before entering a trade, thereby missing out on valid trading opportunities. Overly aggressive traders, on the other hand, may be too quick to get in the market without much confirmation at all. Trade entry rules can be used by traders who are conservative, aggressive or somewhere in between to provide a consistent and decisive means of getting into the market.
Trade Filters and Triggers
Trade filters and triggers work together to create trade entry rules. Trade filters identify the setup conditions that must be met in order for a trade entry to occur. They can be thought of as the “safety” for the trade trigger; once conditions for the trade filter have been met, the safety is off and the trigger becomes active. A trade trigger is the line in the sand that defines when a trade will be entered. Trade triggers can be based on a number of conditions, from indicator values to the crossing of a price threshold. Here’s an example:
Trade filters:
Time is between 9:30 AM and 3:00 PM EST
A price bar on a 5-minute chart has closed above the 20-day simple moving average
The 20-day simple moving average is above the 50-day simple moving average
Once these conditions have been met, we can look for the trade trigger:
Enter a long position with a stop limit order set for one tick above the previous bar’s high
Note how the trigger specifies the order type that will be used to execute the trade. Because the order type determines how the trade is executed (and therefore filled), it is important to understand the proper use of each order type; the order type should be part of your trading plan. Review the Order Types section of this tutorial, or see Introduction to Order Types for more in-depth coverage.
Exit Rules
It's said that you can enter a trade at any price level and make a profit by exiting at the right time. While this seems overly simplistic, it's pretty accurate. Trade exits are a critical aspect of a trading plan since they ultimately define the success of a trade. As such, your exit rules require the same amount of research and testing as your entry rules. Exit rules define a variety of trade outcomes and can include:
Profit targets
Stop loss levels
Trailing stop levels
Stop and reverse strategies
Time exits (such as EOD – end of day)
As with trade entry rules, the type of exit orders that you use should be clearly stated in your trading plan. For example:
Profit target: Exit with a limit order set 20 ticks above the entry fill price
Stop loss: Exit with a stop order set 10 ticks below the entry fill price
Note: If you set this up as an bracket order (OCO order), once one order gets filled (either the profit target or the stop loss), the other order will automatically be canceled. If you place the orders manually, remember to cancel the remaining one to avoid an unwanted position.
Getting Ready for Testing
When developing your trading plan, remember to include all of the important elements:
Trading instrument(s)
Time frames
Position sizing
Entry conditions (including filters and triggers)
Exit rules (including profit target, stop loss and money management)
Keep in mind, writing down your trading plan is only the first step in a lengthy process. At this stage, it's still just an idea - or a template for the final product. You'll have to thoroughly test your plan before putting it in the market. In the next section, we'll show you how.
Source : https://www.investopedia.com/university/how-start-trading/
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