Without a trading plan you’re a fish out of water, you’re directionless, you have no means to measure your performance and you have no rules to follow.
That last point is particularly important. Trading is one of the few disciplines where there are no rules. If you work in an office, or as a baker, a carpenter, a pilot, a doctor or even (apparently) a politician, there are rules to follow and guide you. This gives you a solid reference against which to measure your actions. What’s more, if you break those rules, it tends to have a negative impact on your career but because you know the rules, you know how to correct it in order to resume your flight to the top.
Not so when trading. Look at any chart right now and every tick you see represents the actions of both buyers and sellers. Was buying the right thing to do on that tick, or was selling? Or were both right? Or both wrong?
The answer is, yes, no and maybe. It all depends on the rules the individual traders set themselves.
Your trading plan needs to specify exactly what your criteria are for a valid trade setup. If, for example, you trade with trend and wait for a low test to form on the 20SMA and buy the break of that, have you defined the low test? How big does the bar have to be? How high up is the open and close? Do you need more supporting factors such as timeframe correlation, divergence, horizontal levels etc?
It is up to you to define the rules and then have the discipline to follow them precisely for every trade you take.
Some of the definitions you need to have in your trading plan are:
- Define precisely the setup of your trade.
- How will you manage the trade?
- Where will your exit(s) be?
- What is your risk strategy?
- Under what circumstances will you cut your losses or take early profits?
- What daily / weekly routines do you need to perform (news checks etc)?
Make sure your trading plan leaves little to discretion. You want a check list to follow before you get into a trade, and then an instruction list for managing it. If the setup on the screen doesn’t match the plan, it’s not a trade.
By following the trading plan, you know that every trade you take meets your criteria and therefore losing trades are acceptable because they’ve been planned for.
Adam – TheDayTrader
This article originally appeared in the Sep/Oct 2012 issue of YourTradingEdge Magazine (www.YTEmagazine.com). All rights reserved. © Copyright 2012, YourMediaEdge Pty Ltd.