In a previous article, I mentioned that not having a trading plan is one of the most detrimental rookie mistakes. If you are taking random profits, cutting losses as you feel fit, not having an income goal or any type of structure, you are in for some heavy losses. While every trader is different, I am going to include how I personally have set up my trading plan, and offer a step by step guide so that you can make one as well.
Page 1: Trading Rules
On the first page of my trading plan, I have a list of rules that I have developed over time. As follows:
Entry Requirements
- No earnings plays
- Aim for expiration dates between 35-50
- Always have at least a 50% POP
4. Allocate no more than 3%-7% of your net liquidity to each position
For undefined risk trades– closer to 3%
Defined risk– 7%
Undefined risk trade: Max loss= infinity
Defined risk trade: Max loss is predetermined
While there are many different things that I look for before placing a trade, I have created a very basic list which applies to most of my trades. My personal entry requirements listed above were created after some pretty hefty losses.
To create your entry requirements, reflect on your mistakes. Did you lose a lot of money trading weekly options? Maybe limit yourself to monthly contracts etc. If you do not want to make your own mistakes- learn from mine below and create your entry requirements accordingly.
Exit Requirements
For winning positions:
- Take profits at 50% or when 21 days until expiration (whichever comes first
- If there is a quick profit, take it
Quick Profit:
- 20% in less than 5 days
- 40% in less than 10 days
4. When in doubt, take the profit
For losing positions:
- Roll out in time at 21 days until expiration to the next month if undefined risk trade
- Cut losses at 2x credit received (200%)- undefined risk trades
- If defined risk trade– let it play out until expiration
While you may be able to play around with your entry requirements a bit, having an exit plan is, in my opinion, one of the most important rules of trading. Developing an exit plan that is profitable takes TIME and there is a lot more to it than what I have included- Do your homework. Further, cutting losses for undefined risks trades is a little subjective considering I will be managing them. I included this in here to show the max loss I could personally take in order to remain profitable.
Want to see the formula that I used to make this exit plan? I will include it below!
Keep in mind that there are many different ways to trade, and I of course have times where I choose not to strictly follow these rules. These are just some ideas to help you get started with your own plan.
Page 2: Monthly Calculations
On this page, you will simply be keeping track of your progress. How successful were you this month? How much money did you make? Unfortunately, this is not easily calculated by your brokerage so you need to keep track of it yourself on an excel sheet. Included in this page is as follows:
1. Month
2. Starting P/L YTD
At the beginning of the month, what was your profit/loss?
3. Ending P/L YTD
At the end of the month what was your profit/loss?
4. Income
What is the difference between 2 and 3?
5. Success Rate
How many of your trades were successful compared to your total number of trades? This number should be a percentage.
Overall, this section of your trading plan will show you your overall standing and how well/ terrible you are doing.
In my article, “What Is A Realistic Monthly Income Goal With Option Trading” I go over why keeping track of your success rate and income is crucial for creating steady income. If interested, the article is linked below.
Page 3: Details of Your Trades
Lastly, you need to include the details of your trades so that you can visually see what works and what doesn’t. On this page you will be able to calculate your success rate needed for page 2.
1. Opening Date
What date did you open the trade?
2. Closing Date
3. Trading Strategy
Was this an iron condor, vertical spread, strangle, etc. ?
a. What is the delta of your strikes?
This is mostly important for strangles, as these are undefined risk trades which require management if things go south. Do not worry about this if it confuses you as learning to manage positions comes with time.
4. Credit/ Debit for the Trade
How much premium did you receive for this trade? Or how much did this trade cost you?
5. Max Profit
6. Max Loss
7. Buying Power Effect
8. W/L
Did you win or lose this trade?
9. Profit/ Loss- $
10. Profit/Loss- %
For option sellers, what percentage of max profit did you receive?
11. Expiration
When you opened the trade how many days did you have until expiration?
a. Weekly/monthly
Further, was this a weekly or monthly contract?
Honestly, there are many other metrics you could include in this section, but the ones listed above, are in my opinion the most necessary.
Summary
In order to make consistent income as a trader, you can not just gamble and go in without a plan. You need to be able to sit and look at your data and say “okay, if I am only winning 70% of the time can I afford to only take 30% profits? Can I afford to take max loss on my losing trades? How can I improve my success rate? What strategy is working the best, the worst? etc.” Eventually, your plan will develop and lead you to making better decisions.
I know this was a lot of information so if you have any questions please feel free to leave them below.