When looking for or building a trading plan, very few people consider matching up their goals with their trading plan. A big part of this is that most people don’t even have any goals that they are working towards. Most people might have some vague concept of what they would like to have but no clear specific goals that they can plan towards.

Working out what you want.

The first step is to work out what you want. The majority of the population are trying to cram their lifestyle into their income whereas living a full life is to determine what lifestyle you want to live and expand your income to suit. This is where trading can come into play by providing the extra income to create the lifestyle you want to live.

Some things to consider when creating your lifestyle are:

• Where do you want to live?

• Do you want to be working or live off your trading income?

• How many holidays do you want to have each year and to where?

• What sort of car would you like to own?

• What charities would you like to donate to?

• Would you like to buy your children a house?

• What toys would you like to own?

• What stores would you like to shop in?

• Etc…

These are just a few prompts to get you started but once you have completed that you can then look at what that sort of lifestyle would cost you annually. You can then set a time frame of when you would like to achieve that. This should be set at a time frame that is a stretch for you and is near enough to be tangible and not so far away that it doesn’t spur you into action. Aim at a time frame which both excites you and scares you at the same time.

What trading system will get you there?

Now that you have you income figure and the time frame worked out and you know what capital you have you can figure out what return you need to get with your trading system. Now using a number of concepts Van K. Tharp uses in his book “Trade Your Way to Financial Freedom” we can come up with the following formula:

Expectancy x Opportunity x %Capital risk = %Annual return

Where:

Expectancy = Expected return for every dollar risked

Opportunity = The number or trading opportunities your system generates per year

%Capital risk = The percent of your capital you are willing to risk for every trade

You also need to no what the maximum draw down of your system is likely to be and relate it in terms of your risk amount, ie, you might have a maximum draw down of 25R which would mean if you risked 1% per trade you would have a drawdown of 25% of you capital.

Let’s put some numbers in to see if we can make some sense out of this. Firstly let us say that we want an income of $200,000 of which half of that is derived from your trading so in your last year of the time frame you set you need to be withdrawing $100,000 from your trading account. Now at this point you may also decide to only use 50% of your trading profits for your lifestyle to allow your trading account to grow. This then leads to the requirement of earning $200,000 from you account in the final year. If we work on a 5 year goal then at the end of year five we need to be earning $200,000.

We now know our time frame and end point we also need our start point to know what percentage annual return we are looking at. We can look at a few options to get a bit of a feel for the numbers. If we start with $25,000, $50,000 and $75,000 to look at a few different scenarios we end up with the following required compounded annual rates of return:

$25,000 = 78.6%

$50,000 = 60.4%

$75,000 = 51.1%

Now a couple of assumptions we will now make is that you only want to risk 1% of your capital on any one trade and that you don’t want to be overly aggressive and you want to take around 100 trades per year. This is something you would need to consider to establish what would suit you personally. We therefore now have the following:

Opportunity = 100 trades per year

%Capital risk = 1% per trade

%Annual return = 51.1%, 60.4% or 78.6% (from above)

Which means we would be looking for a trading system with the following expectancy to meet our requirements:

Expectancy = %Annual return/(Opportunity x %Capital risk)

Expectancy = 0.511, 0.604 or 0.786 respectively for the %Annual return

This leads us to a point where we would be looking for a trading system that for every dollar risked we expect a return of $0.51, %0.60 or $0.79 respectively according to our starting capital of $25,000, $50,000 or $75,000.

This is only scratching the surface of some of the things you need to consider for designing or buying a trading system which will meet your goals. If you do go through the exercise you will be streaks ahead of the majority of traders.

Are you frustrated with your lack of profits with share trading? Keep making the same mistakes to lose more money? I can help you become a successful trader and you’ll wonder where the profits have been hiding all this time. Graeme Pearson is a private trader and trading coach to an elite group of people around the world through Your Trading Solutions. Do you want to learn how to Trade Successfully then go to http://www.yourtradingsolutions.com and register for your free report.

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