A professional trader takes the markets seriously and gives them the time and attention they deserve. If you have read this far, you are prob ably more dedicated than the average person. Now is the time to zero in on your plan of action.

You need to allocate a certain time to market work each day; keep ing in close touch with the market is essential for success. You have to decide what markets to trade and focus on a select few to be success ful. You need to design a plan for your education. Last but not least, you need to design your trading plan; a written plan is the hallmark of a serious trader.

Designing a Trading Plan

Traders go through three stages of development. We all start out as beginners. Some of us survive long enough to become serious amateurs or semipros, and a few rise to the expert level. A trader with a good written plan shows a rising level of development.

A beginner never writes down a plan because he has nothing to write. He is having too much fun chasing hot tips and trying to make a quick killing. Even if he wanted to write, he wouldn't know where to begin. A serious amateur or a semipro who writes down a plan, including money management rules, is on his way toward the expert level.

The main difference between a trading plan and a mechanical sys tem is the degree of freedom it allows traders. Trading systems are rigid, whereas plans lay down the main rules but leave you free to use your judgment.

Some beginners gain a false sense of security from pouring tons of data into mechanical systems and finding sets of rules that would have worked in the past. The markets are live social organisms that develop, grow, and change. Rigid rules fitted to past data are not likely to perform well in the

future. If mechanical systems could work, the best programmers would have owned the markets by now. All mechanical trading systems, left alone, self-destruct with the passage of time. Promoters keep selling them because the public loves marketing gimmicks.

A trading plan includes a few unbreakable rules along with more flexible recommendations that call for an exercise of judgment. Your judgment grows with experience. A trading plan includes the princi ples for selecting markets, defines the types of trades, generates buy and sell signals, and allocates trading capital. When you write a plan, avoid the temptation to make it all-encompassing. Know when to stop. Write down your rules but indicate where you will use your judgment at the moment of decision.

You must know what type of trading appeals to you. A general idea-to make money buying and selling-is not specific enough. Winners make money in different ways, while all losers fall into the same wastebasket of impulsivity. A long-term fundamental investor, like Peter Lynch, searching for his elusive "10-bagger"-a stock that rises 10-fold-acts differently from a successful short-term trader who goes short to sell him that stock. Both may succeed in the long run, but the floor trader with a 30-minute time horizon will close his shorts on a tiny but profitable dip before the end of the day, just as surely as the long-term investor will hold on to his longs.

A trading plan reflects your interests in specific markets and techniques, your experience, and the size of your account. It reflects your personality as well as the behavior of your markets. If two friends with equal capital and similar experience traded the same market and wrote down their plans, they would come up with differ-ent outlines. You may create more than one plan if you like different types of trading.

If you do not have a plan, start working on one. Drafting an intelli-gent plan requires a huge amount of work. The first time I tried to do it was on a flight from New York to Los Angeles. I thought that five hours in the air would be enough. A month later I was still at it.

Here are two fairly basic outlines of trading plans to illustrate their basic structure and provide starting points for developing your own. Reading someone's trading plan is like reading a guide to lovemaking. That manual may open your eyes to a few new positions, but ulti mately you'll have to do what suits your temperament and environ ment to enjoy the results.

Trading Plan A Trader A has $50,000 in his account and is inter ested in the stock market. He has been tracking it for a while and has observed that large-capitalization stocks (Dow-type stocks) tend to move in steady trends but swing above and below their central ten dencies several times a year.

A trading plan takes a concept of market behavior-that prices oscillate above and below their average value-and translates it into a plan of action. It identifies the trend and the deviations, selects the tools for catching them, and includes money management rules, profit targets, and stops.

RESEARCH

1. Download four years' worth of data for 30 stocks in the Dow Jones Industrial Average.

2. Use weekly charts with a 26-week EMA to identify their long-term trends.

A serious trader will test other approaches such as a longer or a shorter EMA, different EMAs for different stocks, or another trendfollowing tool, such as a least regression trendline. Finding the best tools for tracking the average consensus of value in your market forces you to do a lot of research before putting on the first trade.

3. Determine the average deviation from value for each stock you plan to trade.

Measure how high a stock rises above or falls below its weekly EMA before swinging back. Channels can help, or you can put the numbers into a spreadsheet. Find out how far from the EMA the reversals occur, both in terms of price and percentages, as well as the average duration of those deviations.

WEEKLY ACTIONS

Review the weekly charts of all stocks you follow. Mark those that have deviated from their central tendencies by more than 75% of their aver age deviation and place them on your daily monitoring list.

DAILY ACTIONS

To streamline our discussion, we will consider only buying even though a complete trading plan is also likely to spell out steps for shorting.

1. Apply a 22-day EMA to stocks on your daily monitoring list to define their short-term trends. Research whether a longer or a shorter EMA would do a better job. When a stock is deviating on the weekly chart but its daily EMA stops moving and turns flat, it becomes a buy candidate.

Here is another research idea: Is buying more profitable when the broad market rises? How will you define the trend of the broad market? The EMA of an index, such as the S&P or NASDAQ, or an indicator, such as a new-high-new-low Index*? If your stocks march to their own drummer, then ignore the broad market; otherwise, you may buy more when the broad market rises and less when it falls.

2. When the weekly chart shows a downside deviation, buy the first uptick of the daily EMA. Research types of entries-below the EMA, in its vicinity, at the market, or on a breakout above the previous day's high.

3. Place a stop using the SafeZone indicator on the daily chart and set a profit target at the weekly EMA. Recalculate your orders daily.

Calculate your dollar risk per share and decide how many shares to buy while observing the 2% Rule. A trader with $50,000 in his account may not risk more than $1,000 per trade, including slippage and com missions. Do not enter a trade if 6% of your account is already exposed to risk in other trades.

This plan includes several inviolate rules: buy only when prices are below the weekly EMA; buy only when the daily EMA is rising; do your homework, recalculate your stops daily, and never risk more than 2% of your account equity; do not expose more than 6% of your account to risk. This plan also makes you exercise your judgment about exactly where to enter, where to set profit targets, and what size to trade (as

long as you follow the 2% and the 6% Rules). It goes without saying that you have to back up your written plan by keeping good records. Your plan is likely to grow more elaborate with the passage of time. The market will throw several curves at you, which will lead you to adjust your plan and make it longer. The plan above ties Triple Screen analysis (multiple timeframes and indicators) with money management, entries, and exits.

Trading Plan B Trader B has $30,000 of risk capital and wants to trade futures. He has noticed that those markets tend to spend a lot of time in flat trading ranges, punctuated by relatively brief but fast trends. He wants to take advantage of those short-term impulse moves.

RESEARCH

This trader has relatively little money, but doesn't want to trade mini-contracts. Therefore, he should focus on inexpensive markets whose normal levels of noise will not overwhelm his money management rules.

For example, a 1-point change in the S&P 500 translates into $250 in the S&P futures. A normal 5-point move on an ordinary day will lead to a $1,250 change in equity, exposing a trader with a $30,000 account to a 4% loss. The 2% Rule puts many volatile and expensive markets off limits for small accounts. Coffee, soybeans, currencies, and many others have to be left alone until your account grows much larger.

1. Download two years' history in corn, sugar, and copper. Corn is the least volatile of grains, and sugar is the least volatile tropical. Both are very liquid, permitting easy entries and exits, unlike other inexpensive markets, such as orange juice, whose thin volume exposes traders to bad slippage. Copper is liquid and tends to be relatively quiet, except during economic booms. E-minis, electronically traded index futures, are good for futures traders interested in the stock market. Download two data series for each contract: at least two years of continuous data for weekly charts and six months of the front month data for daily charts.

2. Test several EMAs to determine which does the best job of tracking trends on the weekly charts. Do a similar job with the daily charts. Find the best channels for each market, especially for the past three

months on the daily charts. Those channels must contain 90 to 95 percent of recent market action. The past three months are the most relevant, but it is a good idea to go back two years in your channel research to prepare yourself for their dramatic expansions and con tractions. Many traders lose their bearings when markets change. If you know your history, you'll feel less surprised.

WEEKLY ACTIONS

Review the weekly charts of your markets and determine their trends. When the weekly trend is up, proceed to the daily charts and look for buying opportunities. When the weekly is down, look for shorting opportunities. If the weekly trend is unclear, either leave that market alone or go directly to the daily charts.

You can define weekly trends by using the slope of an EMA, or you can be more inventive, especially if you track just a few markets. For example, you can use both the EMA and the MACD-Histogram to iden tify trends. When both indicators move in the same direction, they signal extra strong moves.

DAILY ACTIONS

Again, to streamline our discussion, we will only discuss buying, but the same logic applies to shorting. Every futures trader must be com fortable with shorting. These markets have no uptick rule, and the number of short positions always equals that of longs.

1. Apply the Impulse System. When both the EMA and MACD-Histogram rise, they give a strong buy signal.

2. Go long the following day, but do not buy above the upper channel line.

This aggressive entry aims to capture high-speed impulse moves. You will have to research and test this idea in the market you want to trade at the moment. Avoid the trap of mechanical systems that people trade long after the markets have changed.

Before you enter a trade, calculate where to put your stop. See what percentage of capital you will risk in that trade. Decide whether your money management rules allow you to take it. Does the 6% Rule allow you to trade? For example, if you've lost 3.5% of your account this month and have an open trade with 2% of equity at risk, no new trade may be opened because it would risk more than 6% of your equity.

3. Set a stop using the SafeZone indicator on the daily chart.

If your stop placement allows you to take the trade, place the buy order. As soon as you have your confirmation, place your stop. Recalculate your stop and place a new one each day. Don't allow a sud-den violent move to blow through a mental stop while you're not watching.

Take your profit before the close of the day during which the daily screen goes off its buy signal. This means you have to calcu late your formula a few minutes before the close. The upper chan nel line on the daily chart is too modest a target when you are fishing for an impulse move. Stay with the trade as long as the buy signal stays in force. Be sure to test this approach.

This plan combines inviolate rules with recommendations that encourage you to use your judgment. Using multiple timeframes, fol lowing money management rules, using stops, and scrupulously keep ing records are non-negotiable. Choosing the markets, the entry points, and the profit targets and deciding what size to trade-these all depend on your judgment.

Expect to modify your plan as you continue to research the markets and as your expertise grows. Remember to write down any changes, and record your development as a trader. Be sure to add short selling to your plan because this is an integral part of trading futures.

At some point you may want to design a flowchart of your decision making process, along these lines:

Does the 6% Rule allow me to trade? If No, stand aside; if Yes:

Is the weekly chart giving a signal?

If No, move to the next market; if Yes:

Is the daily chart giving me a signal to trade in the same direction? If No, skip that market; if Yes:

Where will I put my profit target and stop; is the risk-reward ratio worth trading?

If No, skip that trade, if Yes:

What size does the 2% Rule allow me to trade and how much will I trade?

One could draw an extensive flowchart for every trade, but the key point is to observe several inviolate rules, mostly having to do with money management and multiple timeframes. As long as you observe those rules, you have a wide choice of analytic and trading techniques. Just be sure to keep good records and continue to learn from your experience if you want to trade like a pro.