Secrets to Successful Trading: Define Your Goals and Make a Plan

By: Markus Heitkoetter
Defining your goals and making a plan is probably the most important task a trader can undertake.
Many traders refer to their daytrading plan as a trading system. That's absolutely ok; since a trading system is nothing else than a structured day trading plan.
Let's take a look at the elements of a good day trading plan:
•Financial Goals
How much money do you want to make?
How much money do you need to get started?
What can you expect when trading a system?
In this chapter you'll learn the answers to these questions. Defining your financial goals is extremely important, since the outcome of the next steps all depend on YOUR goals.
•Selecting a market
You need to determine whether you want to trade Stocks, Options, Forex or Futures.
It really doesn't matter WHAT you trade, as long as you're successful. Each market has advantages and disadvantages which we will discuss here. This will make it easy to find the right market for YOU.
•Selecting a timeframe
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 a trading style
Trend-following, Swing-trading or Trend-fading? In this section you'll learn which trading style is the best for YOU.
•Detailing the daytrading 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.

But don't worry: It's easier than you think, and I already have two ready-to-use trading systems for you.
Let's get started.
Financial Goals
The most frequently asked question of aspiring traders is "How much money can I make?"
Unfortunately there's no easy answer, because it depends how much you are willing to risk.
Day Trading is a function of risk and reward: The more you risk, the more you can make. Here's an easy example: Let's say you start with a $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%.
Unfortunately the trade you just placed is a loser, and 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.
Now let's assume you wanted to risk only $100 per trade and you adjusted your profit goal to $100, too. Now you can 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:
•The risk of losing your money in scenario 1 is 40%. But if you won, you would have made $1,000.
•In scenario 2 the risk of losing your money after 10 trades is less than 1%, but you have a fair chance of making $200.
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. Make sense? I'll give you more specific examples later in this chapter.
Keep in mind that there's 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. More on that later.
What to expect when trading a system.
There's a common misconception about what to expect when trading a system:
Trading a system does NOT mean having an ATM in your front yard.
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 underperforming. Don't assume you'll get a check at the end of each month!
Here's an example:

Investment
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