This is a difficult concept to get across, maybe because I am merely a student and this is one of the concepts I am struggling with, but putting it on paper had proved to be rather more challenging than what I thought it would be.
Some traders have no plan at all. Which is fine if you’ve been trading for 20 years and you can react to the market correctly in its infinitely varied conditions. These traders are the most rare of the lot and are easily the most profitable. Did I mention that they’re very few and very far between? For the most part, traders without a plan – which I am sure number in the thousands – are chewed up and spat out by the market, as they endlessly engage in random decision making and never understand why they keep getting random results.
Then there is the trader who has a great plan… until they have a losing trade, at which point they get another great plan. The plan is constantly changing from one trade to the next. The plan changes half way through a trade. There is simply no discipline to stick to the rules that were created. I’m sure you can imagine how the market rewards this trader. Chewing. And spitting.
The problem here is that the trader does not believe in their plan.
So let’s look at what a good plan should be. Well, good to start off with.
- It needs to be defined. So it needs clear entry and exit criteria along with ‘if/then’ scenarios. For example; what are the things (or factors) that can or should make you close a trade early? It needs to be defined. And on paper.
- It needs to be back tested. There is no magic formula that will work forever, that much we know. There is however, a great amount of comfort that comes from spending the time, doing the maths and running the scenarios to see if your account will survive the crash if you stick to your plan. This will not only indicate if your brilliant new plan is in fact brilliant or not, but will also help you have the faith in it required to stick to it.
And that’s it really. If you come up with something that suits your personality, i.e. you are comfortable with, then all that is left to do is for you to question your sanity as the market rigorously tests your resolve to stick to your plan.
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