Step 2. Methodology Behind Your Trade Plan

There’s a method to your madness, right? Now that you have your objective in mind and know where you’re going with your trading, it is important to describe how you intend to conduct your trading business in general terms, i.e., your methodology.

Once again, it is important to start with some self-analysis so you know what methodology will work best for you. Here’s some questions that will help:

• What is my experience level? (Novice, intermediate, pro?)
• How much trading have I done in other markets?
• Am I sure I’m emotionally, physically, and mentally ready to trade?

Next, it’s on to the nuts and bolts of your current level of knowledge. A prime consideration in developing a trading methodology is recognizing how much you know about the markets you want to trade and the factors that drive them.  The more you know, and the more you are interested in the subject, the greater care you will be able to take. In addition, consider when these markets are open and whether you will be able to offer them the proper attention at important trading times. Carefully consider these questions when putting together this part of your trading plan:

• What type of trader do I expect to be?
  • Day trader
  • Swing trader (1-3 days)
  • Intermediate trader (10-30 days)
  • Long-term trader
• Which markets will I trade?
• How much equity do I plan to use?
• How much of my equity am I willing to risk (in dollars and/or percentage?)
• What is my tolerance for losing? (Low, medium, high?)

Example Trade Plan Methodology

• I am a beginning trader with knowledge of and interest in the crude oil market.
• I plan to be an intermediate trader in this market.
• I have $10,000 in equity and am willing to risk 2%; my tolerance for losing is medium.
• I will be able to offer this market the proper attention at important trading times.
• I know that every Wednesday at 9:30 CDT the EIA releases weekly inventory levels for crude oil, and I need to plan accordingly.