Developing a Playbook: The 5 T's of Trading

Is it realistic to expect consistent returns from your trading if you have an inconsistent, unsystematic approach? Of course not. Most traders would concide the fact that developing a trading plan is essential to becoming a successful, savvy trader. However, while most accept this, few choose to actually take the time to develop a plan.

We are all familiar with the cliche', "those who fail to plan, plan to fail." Nowhere is that more apparent then in the financial markets. Some face the struggle of knowing the best way to structure a trading plan. To help the club members of Noblesville Cashflow Club alleviate this struggle, I have researched and applied a successful trading plan, and therefore would like to share it with my members.

The five key components to a successful trading plan are as follows: goal, risk management, strategic playbook, analysis, and education. While each of these subjects merits its own article, we will focus on formulating a strategic playbook. The cornerstone of strategic playbook is the 5 T's of Trading. The beauty of the 5 T's of trading is their universality. Any style of trader using any trading instrument can use the 5 T's to categorize their playbook. The following is an in-depth look at the 5 T's of trading.

Trade Identification: This can simply be defined as the criteria that must be present before you are willing to place a trade. Those familiar with technical analysis know that there are chart patterns that can be identified and traded, such as bullish or bearish retracements, breakouts/ breakdowns, and double tops and bottoms. Those using fundamental analysis criteria they wish to be present before pulling the trigger. My recommendation is to focus on one or two patterns until you can properly identify and trade them. As you continue to learn and grow, you will come across other tradable patterns, many of which you will add to your playbook. In turn, these new pattern will help you accomplish the goal of becoming a more flexible and successful trader.

Once a tradable chart pattern has been identified, its time to jump in, right? Wrong. To increase the odds of success, try waiting for price confirmation. This falls under our next T-Trigger.

Trigger: Price confirmation occurs when the price breaks pre-determined levels that signify the stock is moving the way you want it to prior to jumping into the trade. One example of a trigger for bullish trades is to buy above the previous day's high or intraday resistance levels. For bearish trades, one example may be to wait until the stock breaks the prior day's low or intraday support levels. In order to develop consistency, it is important to decide when to pull the trigger and do it the same way every time. In my experience, the best trades are those that are profitable right off the bat, and waiting to price confirmation helps to accomplish this.

So far you have identified a bullish pattern, set an entry order, and, bam, it's triggered! Now just sit back and watch money flow into your account, right? Wrong. Thus far you have been completely objective and disciplined in a pattern, waiting for the trigger, and jumping in. Now comes the hard part. Now you've got money in the market. You're married to this trade for better or for worse. In addition, your evil in-laws, Fear and Greed, have moved in and are here to stay for the remainder of your marriage. Their main objective is wreaking havoc on your portfolio and they will do all they can to instigate rash decision making. The next two T's, target and trade management, will help you dispel these two evils.

Target: What are your pre-defined targets? Pre-set targets help keep you level-headed when in a profitable position and greed starts to whisper promises of windfall profits in your ear. A target serves as a benchmark for what price level the stock is expected to reach. Typically when a stock reaches your target, you take action-- such as profit-taking or moving your stop loss up.

Having a specific exit strategy is another key to consistency. How can you expect consistent results in the long run if you continually sell on a whim? There are a myriad of ways to project a target, and as you gain experience, you will continually add techniques to your playbook. Having a pre-selected target also is crucial to calculating potential reward for your trade. Having an acceptable risk-to-reward ratio should be a part of your trade identification. After all, how can one decide whether or not take trade if he has no idea how much profit potential there is?

Trade Management: The adage, "maximize your gains and minimize your losses," is the goal here. Having set rules in place will allow you to do just that. Trade management is where rules for stop placement and movement, hedging, and techniques, and techniques such as scaling in and out, are determined. It is nice to have rules in place that dictate when to adjust your position, rather than making a decision on the fly. By pre-determining stop placement, you can then calculate your potential risk in the trade, thus allowing you to evaluate the risk-to-reward scenario and whether it is acceptable.

Tradable Instruments: Throughout your trading career, you will learn to utilize different financial instruments. Stocks, options, spreads, and futures are all tools used by savvy investors. As a part of planning your trade, it is necessary to specify your instrument of choice for that specific chart pattern and trading style.

Equipped with the 5 T's, every trader will be on there way to a more consistent, systematic approach to the markets. However, keep in mind that having a trading plan and following that plan are two different things. You must develop the discipline to follow your plan to the "T". Once your playbook is compiled and you have the self-mastery to follow it, you are one step further along the path of market proficency.

Developing the Rich Investor Mindset

Do you want to be rich?

Many people would say, "Well, I'd rather be rich than be poor." And, of course, there are those who reply, "You know, money isn't everything. And I'd rather be happy than rich."
I could never understand why certain people think that you must be either happy or rich at the expense of the other. I guess the real question you must ask yourself is: "Can't I have both money and happiness?"

Personally I don't think that the Rich Investor Mindset is "Magic Formula", it is something that you must find inside yourself -- Specifically in how you think -- and your mindset. How and what you think, what you say to yourself, how you react to circumstances, and what you aspire to will directly affect what you receive in life. Basically if you say, "I can't do that." then you can't do that. If you are afraid of even making a mistake that you avoid the new and unknown then you don't learn or grow. Yet if your words are, "I can!" "I will!"- in other words, if you say "Yes" more often than "No"- and you look at the new and unknown as an adventure and an opportunity to learn, then your chances for success increase dramatically.

"All that a (wo)man acheives and all that he/she fails to achieve is a direct result of his/her own thoughts." - As A Man Thinketh, by James Allen

Adopting a mindset that produces what you truly want in life versus one that leaves you struggling is definately a willingness to improve yourself.

According to a book called Mindset:

There are 2 types of mindsets. The first is the Fixed mindsets. People with a fixed mindset believe that a person is born with a certain amount of intelligence and that amount does not change. His/Herpersonality, talents, strengths and weaknesses remain constant throughout her life. He/She may learn new things but his/her intelligence does not grow.

The second mindset is called Growth mindset. These people believe that your intelligence, abilities, aptitude and character can constantly change and improve through learning and experience.
Here is the key: Because the fixed mindset person has a set amount of intelligence they spend their whole life proving how smart they are. These are the people who flaunt there degrees and titles. They know all the anwers. They constantly seek out validation. And because of this they cannot make a mistake. They cannot fail. For if they did, that failure would jepardize their very existence. They think, "If I make a mistake or fail then I'm not as smart or talented as I portray myself to be." They seek out the unknown. They do not take chances because, God forbid, they might fail. These are definately the entreprenuers of the world.

The growth mindset people, on the other hand, welcome challenges. They want to tackle the unknown. They opt for the more difficult problems. They have a passion for learning and for growing. They want to constantly stretch themselves because thats how they get better.

Have you ever heard someone say (or maybe even you said this), I'm not good with money." Or "My eyes glaze over when I think about investing." How about this one: "Investing is too difficult. My mind doesn't think that way." Or this: "I started investing but I'm bored with it." Those thoughts are all coming from a fixed mindset. The growth mindset would say, "I don't know much about investing today but i can learn it and apply it and probably become a great investor."

So if you have a fixed mindset, how do you adopt a growth mindset? I've found that the first and easiest step is to simply be aware of the two mindsets. If you listen to your words and watch how you react to situations you'll begin to recognize when you're in a growth or a fixed mindset. What you say to your kids is another sure giveaway.

When it comes to investing, if you stay in a fixed mindset I believe that your chances for success are slim. I see people freeze up when I guarantee them that they will make mistakes with their investments. It's part of the process. But if you're in a mindset where mistakes threaten your very existence then what I'll hear are all the reasons why investing wont work. In investing sometimes you win and sometimes you lose, but you always come away smarter and better prepared for my next investing. Making mistakes, learning from them, and getting smarter are all part of the investment process and, as you can see, are ideally suited for the growth mindset.

Don't Underestimate The Power of the Moving Average.

Whether you are investing or trading, the moving averages can help you pick the right stocks to get into at the right time. Whether you are looking at the Overall market, a particular industry or sector, or the individual stock itself, the MA can help determine the overall direction of where the a stock will go. Typically a professional trader typically will use four different MAs. On a daily chart, I use these MAs:

1. 13 EMA
2. 20 SMA
3. 50 SMA
4. 200 SMA

EMA stands for Exponential Moving Average, and SMA stands for Simple Moving Average.

Now depending on which way the general market is going, determines if i am going long or short.

For shorting stock in a bear market, the ideal MA pattern is as follows:

Downtrending 200 SMA > Downtrending 50 SMA > Downtrending 20 SMA > Downtrending 13 EMA > downtrending stock itself.

For going long on stock in bull market, the ideal MA pattern is as follows:

Uptrending stock itself > Uptrending 13 EMA > Uptrending 20 SMA > Uptrending 50 SMA > Uptrending 200 SMA

this technical analysis indicator is best used when the market, sector and individual stock compliment each other.

The formula for getting rich.

There is a simple formula for getting rich. But first you need to know the three kinds of income. The first is earned income, which is monthly cashflow from a job from your investments. the second type of income is portfolio income which is from stocks, bonds, mutual funds, etc. This is in the form of capital gains. The third and final type of income is passive income which is the income you receive from rental properies, covered calls, royalties, etc.

How you get rich through this process takes a lot of education, but this is the quickest way to become financially free.

First you need a good professional education, preferrably a degree from a college. Keep in mind the cost of going to a college, because you don't want an enormous amount of college debt. I have a friend who will graduate with school loans the size of a home mortgage. Try to get out of college with as little school loans as possible.
With the Cashflow (total income minus total expenes) you receive from this job you will should put your money in a stock trading account. Make sure you take a course or two on how to trade stocks. Trust me, it will greatly decrease the risk you take on, as well as maximize your capital gains. Done properly trading can multiply your money extremely quickly. I know people who have turned $30,000 into $150,000 in about a year.
With the capital gains you receive from trading stocks, you will then invest in things that can give you passive income such as real estate investments, and covered calls.
With your job continuing to put money in this triad of wealth builders, you should become wealthy in no time, as long as you have th discipline of cashflow management.

Recommended Trading Books

Here are a few books that I would recommend people read if they are interested in learning how to trade:

A Beginner's Guide to Day Trading Online, By Toni Turner
A Beginner's Guide to Short Term Trading, By Toni Turner
Short Term Trading in the NEW Stock Market, By Toni Turner