There was a famous and very successful basketball coach in the United States that once said, “Failing to plan is planning to fail.” This is even truer when it comes to trading. So many traders fail because they do not have a plan that they follow for their overall trading or even on individual trades they take.
Having an overall trading plan that details how we will trade and protect our capital is critical. If we are not trading well, we need to know how to fix it. By having a plan, we have a base on which we can identify the problem and fix it. Without the plan, we would not know what we were doing wrong. More importantly, to duplicate successes, we need to know what we did to find that success!
Having a plan prepares us for trading. Being prepared is something we all must do as traders. We do not know whether the markets will go up or down. Sure we can anticipate the most probable direction, but a trader will never be 100% sure. So, how can we protect ourselves against inverse market moves? Simple: be prepared!
Preparing for the markets involves identifying any possible dangers that may confront our positions. I see too many students who are new to the markets focus too heavily on the possible profits the trade may offer them. Professionals and those who will last long-term focus on the risk of the trade and look for all possibilities. The best way to do this is by having a plan prepared for your trade prior to entering it.
In the Online Trading Academy Pro Trader Course as well as the Extended Learning Track Class, we emphasize the need to have a complete trading plan as well as a plan for every trade you will take. The two plans are a way to remove the emotions from your trading and force you to objectively look at all possibilities in the market. We must create the trading plans before we have an open position so that we do not have a bias or emotion attached to the market.
In the first part of the trading plan, the trader should look for reasons as to why this is a suitable trade to enter. Usually this is the easiest section for the trader to complete as we all want to trade and it can be easy for us to rationalize why we should enter. Be careful to make sure they are valid reasons such as technical analysis, fundamentals, and related markets.
Now the hard part begins. The trader needs to start listing the negative factors that may work against the trade. This is where you have to find the dangers that could increase your risk of losing. We don’t want to think about being wrong and typically have a mental block that prevents us from seeing the danger or causes us to rationalize it. Look objectively at the markets and decide if there are dangers. List them to remind you to be aware and prepared for them!
Once you have the factors identified, it is time to write out the plan. Locate support and resistance levels, the desired entry point, target area, and where you will place your stop. The entry, exit and target will be determined by using the tools and tactics you listed in your overall trading plan. You should then write out your trade. Be specific! Write out your entry and type of order to be used. Detail where and when you will place stops.
By completing this trade plan, you accomplish several things. You have accountability if you violate the plan and can build discipline. But you also build confidence when you follow your plan and you either make money or lose very little when things don’t work out as you had planned. By preparing the trade plan, you prepare for surprises and will not be shocked into large losses when the market makes a volatile turn.