Become a Top 1% Trader By Creating Your Own Trading Plan | OVTLYR University Lesson 5
Building the Trading Plan Framework and Position Sizing
This lesson establishes the foundation of a real trading plan. The focus is not on entry signals, profits, or setups. The focus is on what you are allowed to trade, when you are allowed to trade, and how much you are allowed to risk. Every rule covered in this session exists to prevent account destruction and enforce survival first. The trader is fully responsible for all rules and all outcomes.
1. What You Are Allowed to Trade
The first rule in every trading plan is defining what instruments you are allowed to trade.
This includes:
● Stocks
● Options
● Futures
● Crypto
● Long shares with no leverage
● Leveraged derivatives
Broker restrictions also apply:
● Account approval levels
● Option permissions
● Margin access
You must:
● Choose what products fit your experience level
● Specialize in one area instead of trading everything
● Avoid instruments you do not fully understand
Selling options is explicitly disallowed due to extreme risk exposure.
There is no boss enforcing this.
You define what “allowed” means.
2. Liquidity Rules
Liquidity determines whether you can enter and exit without getting trapped.
Liquidity means:
● There are buyers and sellers available
● You can transact without large slippage
● You can exit when wrong
Core liquidity risks:
● Penny stocks
● Thinly traded options
● Wide bid-ask spreads
● Low open interest
Key liquidity measurements:
● Average daily volume on the stock
● Open interest on the option strike
● Bid-ask spread width
Baseline framework used:
● At least 1 million average daily volume on shares
● At least 250 open interest on the option strike
● Open interest should be 4 to 6 times larger than your intended position size
● Spread should be as tight as possible
If you cannot get in cleanly, you will not get out cleanly.
3. When You Are Allowed to Trade (Market Conditions)
The second major rule is defining when you are allowed to trade.
You are not allowed to trade simply because the market is open.
Market condition rules can include:
● Trend conditions
● Bull markets
● Bear markets
● Choppy environments
● Volatility levels
A valid framework discussed:
● Market trend
● Sector trend
● Stock trend
All three must align before a trade is considered valid.
You must also define:
● When to be aggressive
● When to be defensive
● When to stay in cash
You are also responsible for knowing:
● When the market is not working
● When to stop trading altogether
4. Risk Management Is the Core of the Plan
The third major rule is defining how much you are allowed to trade.
This is position sizing and risk control.
Every trade answers the question:
“How much am I willing to spend to find out if this works?”
Risk is defined before entry.
Risk is not:
● How much you hope to make
● How many shares you want
● How confident you feel
Risk is:
● A fixed dollar amount
● Or a fixed percentage of the account
This must be:
● The same across every trade
● Consistent and repeatable
5. Stop Loss Definition
A stop loss is:
● The price where the trade is proven wrong
● The price where risk is fully accepted
There are different stop styles:
● Fixed stop
● Emergency stop
● Trailing stop
Key rule: Stops can only move in one direction: up.
Moving a stop downward increases risk and violates discipline.
The stop exists to:
● Stop financial bleeding
● Prevent emotional decision-making
● Prevent “long-term investor” excuses after failure
6. Working Backwards to Position Size
Position sizing is calculated by working backwards from:
● Maximum dollar risk
● To stop distance
● To number of shares or contracts
The process:
1. Define account size
2. Define risk percent
3. Multiply to get total dollar risk
4. Divide by stop distance
5. That result determines share size
6. For options, divide by delta to get contract count
This creates:
● Identical dollar risk across all trades
● Even if contract counts differ
● Even if stock prices differ
● Even if volatility differs
ATR (volatility) determines stop distance and share size.
7. ATR-Based Risk Consistency
ATR adjusts position size based on volatility.
Volatile stocks:
● Wider stop
● Smaller position size
Stable stocks:
● Tighter stop
● Larger position size
This prevents:
● Overexposure to high-volatility stocks
● Underexposure to stable stocks
Every trade carries:
The same dollar risk, not the same number of shares.
8. Portfolio Risk vs Position Risk
Two layers of risk exist:
● Position risk: How much one trade can lose
● Portfolio risk: How much of the account is allocated
The example shown:
● Roughly 6 percent maximum loss risk
● Roughly 10 percent portfolio allocation
Options allow:
● Smaller capital allocation
● Without full share exposure
● With controlled risk limits
9. Risk Must Scale Slowly
New traders must start with:
● 1 percent risk per trade
Only after consistency:
● Move to 2 percent
● Then 4 percent
● Then higher if emotionally stable
Jumping from 1 percent to 5 percent:
● Can erase months of progress in one loss
● Even when the system is correct
Survival comes before profits.
10. Protect the Family Rule
The account represents:
● Years of work
● Sacrifice
● Security
● Responsibility
Risk exists to:
● Create opportunity
● Not to create destruction
If the account is lost:
● You cannot trade
● You cannot recover
● You cannot participate
Survival is the primary objective.
11. Expectancy Requires Losses
Every trading plan must include:
● Winning trades
● Losing trades
If losses are not built into the plan:
● There is no real plan
● Only fantasy
Expectancy depends on:
● Average win size
● Average loss size
● Win rate vs loss rate
Losses are not mistakes.
They are part of the math.
12. Personal Responsibility
No one enforces your rules.
No one breaks your rules except:
● You
No one causes your loss except:
● You
There is no rescue system.
Every result comes from:
● Your rules
● Your execution
● Your discipline
Core Lesson Summary
● A trading plan starts with permission rules
● Liquidity determines survival
● Market conditions gate all trades
● Risk is defined before entry
● Stops exist to protect capital
● Position size is built from the stop
● ATR keeps risk consistent across trades
● New traders must start at 1 percent risk
● Survival beats profit chasing
● There is no external enforcement
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