I believe, and share with people, that options trading requires four levels of planning. Usually, a trader requires only three levels of planning:
· business plan
· system plan and
· trade plan.
However, options are different to all other trading instruments due to the asymmetry of the options pricing model and the impacts of implied volatility. This very uniqueness is what makes them such a flexible and safe trading instrument, once the risks are understood and managed. That flexibility and risk management is achieved through correct application and management of various options strategies. The need to understand the construction, management, adjustments and best exits of options strategies presents the need for the strategy plan.
So, I believe that there are four levels of planning for options traders:
· business plan - vision, goals, money, mind, methods, etc
· system plan - scans, prognosis, etc
· strategy plan - construction, weaknesses, strengths, adjustments, etc and
· trade plan - entry rule, five exits rules, records, reviews etc.
To clarify, these are levels of planning, not actual plans. It is quite feasible to combine a strategy plan within the system plan by adding the relevant strategy information into the system plan.
This approach is built into all my systems, along with templates and suggested wording for your own plans. More information is available to members.
In the future this document will also be made available to subscribers.