This is really where the rubber meets the road. 

Up to now you’ve worked your way through the Foundation Phase, soaking in every piece of information and every concept you can, pushed your way through and out of the Exploration Phase, studying and testing as many trading styles and strategies as you can get your hands on and letting your instincts guide you to the right ones, successfully navigated through the Gravitation Phase, continuing to move forward by trusting your instincts and focusing on the right styles and strategies, accelerated through the Streamline Phase, gaining structure by focusing even more of your time and efforts on your favored styles and strategies and less time on the others, and landed firmly in the Muscle Phase, now working to get even stronger at your favored strategies until they became your core strategies – your unique and profitable approach.

You’ve taken all those concepts and strategies that other people developed and really started to make them your own. And you’ve stayed in the game. That’s a big deal.

Now that you’re in the Muscle Phase it’s time to get ripped by turning all of this hard work into real, consistent money. It’s time to put your trade plans into action. Just remember that the trade plans for the strategies you’ve back tested, simulated and traded live, were developed for a reason. And since they showed positive expectancy in back testing there’s no reason to deviate from them now. But following your trade plan in the live markets is harder than you might think.

The strategy’s trade plan determines where you’re going to enter and when, with how much risk, when you’re going to exit, how much money you want to make (your profit target) and how much you’re willing to lose (your max loss) as well as how you’re going to manage the trade (your pre-planned adjustments) and attempt to keep it viable through unexpected price movements, unfavorable conditions or a sudden environmental change.

Here’s an example of a trade plan for an iron condor strategy in index options, which has been back tested over 10 years and shows positive expectancy:

     Vehicle: $RUT

     Duration: 50 DTE (days to expiration)

     Enter after a down day in the $RUT

     Shorts at 10 Delta

     Longs 10-20 points away

     Target credit: at least 40 cents

     Profit Target: 10%

     Max Loss: 15%

     Exit at 7 DTE no matter what

     If Delta of the short increases by 10-12 roll the bad side and increase size by 10-15%

     If Theta approaches zero roll both sides to similar Delta you started with

It should be fairly obvious that the strategy is nothing without the trade plan. It’s like having the ingredients for a delicious cake without a recipe to follow and the instruments to actually mix it up, bake it and eat it. So if you want to mix it up, bake and enjoy that particularly delicious cake, you’ve got to follow the recipe. In other words, you’ve got to turn that concept into an actionable strategy.

Seems obvious right? Surely you’re going to follow that plan, right? Well, just wait until the markets throw you a curveball and you think you know better than the plan. It happens all the time, especially to newer traders and traders who haven’t yet developed the requisite discipline. But once you change the plan it ceases to be that strategy with positive expectancy and becomes something entirely different. It actually becomes a mystery at that point because now you don’t know for sure what you can reasonably expect. Just one change to the plan can alter the entire course of the trade.

In order to maintain the reasonable expectation of consistent profitability that you achieved in back testing you absolutely must have the discipline to execute your trade plan the way you designed it and tested it. Even through deep market selloffs and big market rallies you have to stick with your trade plan. After all, if you look through your back tests you’ll see that your plan may very well have endured similar kinds of market conditions (if you back tested it far enough). But looking at back test results is completely different than actually experiencing the trade in the live markets, which is why sticking with it can be such a challenge.

And then there are the so-called curveballs. When the markets do things that they didn’t do in back testing – no market environment is ever exactly the same – will you have the discipline to stick with the plan? When big news hits the tape and makes the S&P jump 3% in one trading day and then news hits the tape again overnight and makes the S&P reverse 3% the following trading day (this can happen), are you going to be able to stick to your plan? In order to be a consistently profitable trader over time you should definitely stick to it. This level of faith in your strategies is crucial not only for consistent profitability but for development as a disciplined trader.

That said, if you feel strongly about changing the plan because of a shift in market environment or because it turns out you don’t feel comfortable with the actual execution of the plan, the best thing to do is to stop trading the strategy and put it back in the testing environment. Determine if the change you want to make still yields positive expectancy and that it’s a plan you’d be comfortable trading. If it does and is, then you have a good reason to start simulating it so that you can eventually trade it again in the live markets. But you’ll have to commit to the new plan and not change it when the markets throw you those curveballs.

By the way – I think it’s very important to mention this here – when you start trading your strategies in the live markets for the first time, I highly recommend trading them at the smallest amount of risk possible. Your profits might not be meaningful but your losses won’t be out of your comfort level. And you’re just trying to learn whether or not the strategy is viable and the trade plan is realistic in the live environments anyway. You should be focused on learning about your strategy at that point, not generating profits from it yet.

But even at a small amount of risk it’s important to start placing live positions, removing live positions, getting filled by actual market makers and making and losing real money. This is how you get familiar with the real-world application of your strategy. Back testing is important for developing clear trade plans that show positive expectancy and simulating (paper trading) your strategies is crucial for understanding whether you’re comfortable with the trade plan and getting used to it, but trading in the live markets is where it all comes together for your strategy.

So what about those plans that you weren’t able to back test to your satisfaction because your approach is so highly discretionary? How do you go about testing and trading those strategies with any confidence? Well, this is where really paying attention to the market environment becomes so important. Always paying attention to your market environment is crucial no matter what your trading approach is, and I’ll talk about this in a subsequent step, but it’s even more crucial when your approach relies almost completely on the kind of market environment you’re in.

Following a trade plan that you’ve back tested and which follows clear guidelines and rules is hard enough. But when you’ve developed a more highly discretionary strategy that, let’s say, takes advantage of stocks and ETFs – including sector and index ETFs – that may be good candidates for your approach for only two or three months at a time based on the current environment, you obviously have to make decisions that rely on more immediate or short-term criteria. Nevertheless, you still need a very clear trade plan each time you make a trade. Otherwise you’re just flying blind and that’s a sure way to not be profitable.

You’ve got to follow the same protocols you followed for developing the trade plans of the more mechanical strategies: make sure the plans fit your lifestyle and that you’re willing to follow them.

And no matter what kind of strategy you’re executing, always write down your trade plan in a clear, concise way. If anyone were to ask you what your trade plan is for a particular strategy you want to be able to both explain it clearly without hesitating and show them the plan on paper or electronically.

Here’s an example of a discretionary bullish swing-trading plan in stocks:

     Stock is showing relative strength but has pulled back to its 50-day moving average

     ATR is at least 1.5 points over the last 14 days

     Its 50-day moving average is above its 200-day moving average

     Relative volume has remained low during pullback

     There is clear rotation into its sector

     S&P has pulled back to its 50-day moving average or lower

     S&P’s 50-day moving average is above its 200-day moving average

     Setup shows a minimum of a 1-to-5 risk-to-reward scenario

     Take half of position off at 5 points, one-quarter at 6 points and leave the rest to run

     Stop loss at 1 point from entry then trail up if price reaches 5-point target

Since I’m talking about actually applying your strategies this is a good time to discuss the concept of scaling up your risk capital. In my opinion, scaling up is not a one-size-fits-all thing. It depends on the nature of the strategy itself, its historical pattern of performance and its performance expectations in the current market environment, just to name a few.

There are different methods of scaling up, like reinvesting your profits so that you only lose what you make or waiting for a drawdown so that the probabilities are higher that your system will soon experience a win. Another method would be to gradually put more and more risk in your best setups. For instance, if you swing trade stocks or trade them intraday and you have a tiered setup system (A+, A, B+, etc.) then it makes the most sense to put more of your money in the setups that you’re best at and which show the best risk-to-reward profiles, and less risk in the lower tiered setups.

I’m a big proponent of scaling up very gradually, no matter what you’re trading. Don’t double your size overnight, scale up by small percentages. Maybe your next position will have just 10% more risk allocation than your last one. But make sure to trade at that risk allocation several times before jumping another 10%. This helps avoid high stress levels when thinking about losing larger amounts of money. When you’re sticking to your trade plans and closely following your max loss percentages, then you’re still losing that 10% you were losing before. Even if it may be a little more money than before it’s still the same percentage, and that can be helpful psychologically.

No matter how you do it scaling up takes some bravery and some confidence in your abilities and in your strategies. But you have to have a method of scaling up if you want to make real money in this business. 

This is another reason why having faith in yourself and your strategies is so important.  You’ve got to have this kind of faith as well as the discipline to follow your trade plans before you can even think about when and how to scale up your risk. This all goes hand-in-hand with getting better at what you do. 

Did I follow my trade plans?

Not in the beginning, that’s for sure. But enough futility and enough losses made me see the light.

My core approach incorporates both types of trading. I employ both highly discretionary strategies as well as more mechanical, even fully automated strategies. During the market selloff of February through March 2020 caused by the coronavirus pandemic my automated long volatility strategy kicked in to high gear and my net worth increased by multiples. Running that fully automated system ended up being one of the best things I’ve ever done as a trader because my faith in the strategy allowed me to stick with it during the drawdowns.

But then in March when the markets started to bounce I had to become much more flexible. The markets (and the world) had changed in a matter of a few months and I knew we could see either a continuation of the selloff or a big bounce. So I had to be ready for either. 

This is something I’ll talk about in a subsequent step, but what helped me continue to make money in the ensuing market environment was asking myself every day, “What has edge in this environment?” Especially if you’re a highly discretionary trader, you’ve got to do this in order to have a chance at staying consistently profitable.

No matter what I believe has edge in the current environment, though, I always have a very clear plan before I make a trade. I’ve learned from not following my plans, and from not even having plans when making trades, that it’s a recipe for consistent losing. And I always have a “What if?” in my plan just in case I’m wrong or in case something unexpected happens.

You see, the markets demand discipline. They know when you’re being lazy or when you think you’re smarter than they are and they’ll punish you accordingly. If they don’t punish you right away they’ll do it eventually. Sometimes the markets will let you make a run here or there without being disciplined, without any humility. But inevitably you’ll run into that painful, sometimes devastating loss because you’re not respecting them.

You’ve probably heard it said that it might be the worst thing for a new trader to actually experience success in the beginning because then the new trader believes he or she may have some special gift for trading or thinks trading is actually easy and not sure why everyone is so scared of it. Well, it’s true.

After I had taken my first course in technical analysis and options, my first trade was a covered call in AAPL. I based my decision on my primitive understanding of the charts at the time and hit a lucky streak. AAPL exploded and while I had to constantly roll up my short calls my long calls were making lots of money. By the time I hit $15,000 I was bragging to my friends about what I’d done after just one course. And then, of course, I gave it all back just as quickly as I’d made it.

How? I doubled up at the top and stopped selling calls because I figured AAPL would just keep going. In other words, I didn’t have a plan. I’d bought so many calls as AAPL kept advancing that when AAPL finally started to pull back the losses became too much for me so I panicked and sold out of my position. Since I didn’t have a plan, I took losses during the pullback instead of staying in for the move higher against support and the market gladly took my earnings back with a slap on the back and a “Thanks for playing!”

AAPL of course moved higher after my weak hands had been shaken out.

Have a plan and follow it. If you’re willing to execute your plan with discipline then you’ve taken a big step forward and equipped yourself with the tools necessary for consistent profitability.