The Trading Plan
As the saying goes, “if you don’t stand for something, you will fall for anything!” In the trading world we are faced with decisions we have to make everyday. How much capital should I risk? When will I risk it? What is my profit targets? These are all questions that your trading plan must answer. Your trading plan is your moral code; It is your guiding light in the wormhole we call the market.
The 5% Trader
Working closely with new traders, I have noticed certain character traits that separate those who catch on quickly, from those who continue to struggle month after month. It is self-actualization. While some put being a successful trader on an unreachable pedestal, there are the 5% who see the task as difficult, yet obtainable. There is without a doubt a learning curve for coming into the market, but the 5% trader is able to clearly see this curve. From there, they are able to plot and take the necessary steps needed to reach said target.
The Belief System
A market bias is a belief. Your trading strategy and plan is your lens to the market. As a market participant you are vulnerable to manipulation. Without a belief system that vulnerability is amplified. You may find yourself being swayed into seeing the market through the lenses of others. Whilst seeing the market through the lens of others can be a positive attribute, especially when you are at the starting out and studying phase, it can be detrimental to one’s live trading performance.
(i). You may second guess your own analysis and not take or close a trade without external approval.
(ii). You could find yourself seeking signals from other traders.
(iii). You may even become market drunk to the point where you cannot form a bias or clear opinion on the state of the market.
(iv). It can also lead to fear of getting in (FOGI) or fear or missing out (FOMO), causing you to respond to the market in a purely emotional manner.
Your trades may perform better without this outside influence, that can cause you to second guess yourself. You must be able to strike the balance between having external input and being able to form your own coherent trade analysis and bias.
Now that we are aware of the pitfalls of not having a concrete belief system as a trader, how can we avoid being a market casualty? How does one calcify their view on to the market and their trading? The answer is with a trading plan.
A complete trading plan includes everything a trader needs to approach the market with. It covers how the trader should respond in every scenario, whether they are in a trade or not. This allows the trader to act as objectively as possible.
A complete trading plan is no different than a complete business plan. It includes the trader’s hours of operation, risk management parameters, trading strategy and usually a variety of mental checklists.
The trading plan must be clearly defined. It includes detailed entry and exit criteria for your trade. The enigma of the trading plan is that you are placing an objective method on how you come to a subjective conclusion. Your personal trading plan should be no different.
As you progress, you will start to notice many oxymorons in the trading world.
Produce Then Reduce
How does one approach creating a trading plan? I recommend a process I call produce then reduce. In essence, you write down everything you can think of that is relevant to your trading. You can include all the various setups and parameters that fit your personal criteria, all of your entry and exit rules and anything else you can think of that would influence your trading. This the production phase. From here you may find yourself overwhelmed with a trading plan of several pages. This is normal. Trust the process.
At this point it is time to reduce. Time to simplify! Narrow your focus. As a new trader I recommend focusing on one setup. Master that setup through practice and repetition. As the legendary Bruce Lee stated “I fear not the man who has practiced 10,000 kicks once, but I fear the man who has practiced one kick 10,000 times”.
The trading plan is a powerful weapon. It will save you from yourself. It will assist in keeping you objective. When faced with FOGI or FOMO, you can turn to your trading plan and ask yourself “does this trade fit my plan?”. If the answer is yes, you take the trade and if the answer is no then you don’t. Sounds simple right? But what happens when you have a plan but don’t stick to it?
Although a trading plan assists you in identifying your emotions and emotional responses, it will not free you from them. This is your internal struggle you must overcome. These are the trader demons Oliver Velez speaks of in his ‘Trade the Open Like a Boss’ series.
I have seen it over and over, where the trader creates their trading plan, yet constantly breaks it. Sticking to your plan is a journey in itself. The trading plan is your map on that journey. Learning to stick to your plan is not an overnight process. It requires a discipline that is formed through repetition. There are many activities you can do to build discipline, such as meditation, exercise and healthy eating amongst others.
The underlining goal on the pursuit of discipline is to reach a space of self-actualization. This allows you to be truthful with yourself. This allows you to observe your objective from a space of clarity. As we become a 5% trader, we remain clear in our beliefs of the market. Our trading plan is an outward manifestation of this belief. So let’s think it, write it, manifest it!