Lessons from the Pros


Planning Leads to Consistency – Part 1

Many traders face a very common problem while learning to trade.  They seem to be given a lot of information, but then the information is not put in a format that allows the trader to plan their trades consistently.  I’m writing a two part article about some rules that might help you find structure in this chaotic world of trading and information overload.

As consumers, most of us tend to be good planners when it comes to making decisions about a major purchase:

  • We plan where we will shop for the item
  • Our trips to the stores are planned to eliminate too much backtracking
  • Consideration for quality and durability is given by researching product reviews
  • And above all, we research price to make sure we are buying at a good value

Free Trading WorkshopWow, seem like a lot of effort?  After all of the preparation and research, the purchase is made and the product is in the new owner’s hands.  The satisfaction of knowing you got a great deal for such a high quality product makes you very happy. However, when it comes to their trading many will simply just “wing it” with no logical or systematic set of rules in place.  Some traders are willing to risk their hard earned capital on emotional trades instead of planning out a trade to be more consistent in a probability driven endeavor like trading.

Here are 10 rules that should help a trader better plan their trades:

Principal #1 – KISS Principal

We have all heard of this acronym – Keep it Simple Silly.  As traders learn more and more about trading, a common trap they fall into is they start to add too many confirmations to their setups.  Making your strategy complicated will cause you to have indecision (paralysis of analysis) when it is time to take action.  Confirmations are used to add confidence to your trade.  When you have to start looking at too many you start second guessing them.  There is nothing wrong with being aware of these added confirmations, but I would suggest you back test all the ones you use and take the 1 or 2 with the highest percentage of success and only use them.  By use them, I mean have them identified in your trading plan as the “only” tools you will use to confirm your trades.

Principal #2 – Plan the Trade, Trade the Plan

This is where all the thinking in trading comes into play, while writing your trading plan.  Once you have created your rules to trade by, you become more systematic and logical in your thought process for executing successful trades.  Your personal trading plan will include every step of the trade from identifying to exiting your trade.  By having your setup written down in your plan you will have a better chance of using patience and discipline to wait for your entry.  Otherwise you will use emotions to enter trades and we all know where that will get you.  After entering your trade you will have more confidence because you have back tested your strategy and know that it has a successful track record and will give you that extra edge over your competition.  Identifying your entry strategy will help you execute your strategy in an efficient manner with no hesitation.  There will be no guessing or wondering what to do once your setup is identified, you just click and go.  Your risk management is also pre-defined so your initial protective stop is set on entry and you know when you will be moving your protective stop to breakeven after the market moves in your direction by a certain amount.  Of course, your price target is also known in advance and how you will exit the market at this target.  Will you have a set price target, a trailing stop, a time stop, etc.?  Try and be like an airline pilot who has a written checklist to be followed before every take off.

Principal #3 – Sitting on your hands

This is probably the most difficult part of trading.  We have this well thought out strategy and now we must wait for the setup to materialize.  Who ever thought time could pass so slowly?  Many of us are raised to think we must always be doing something or we’re missing opportunities.  So we end up taking boredom trades because our market is not co-operating at the moment.  One of the advantages to entering a trade is that we can set the conditions and the market must come to us in order to offer us a low risk/high reward setup.  This is where discipline can help when the patience runs short.  You must remind yourself that you will only have your “edge” if you wait for your setup.  Keep in mind that no one strategy will work all the time in the markets.  There will be times when you will miss a market move because you had no setup or the price did not come back far enough to get you in, do not get upset.  Keep this in mind, “The markets were here before us and they will be here long after us.”  Simply stated, there will always be another opportunity to make a trade.  I would much rather miss a market move because I had no signal than know that I chased a market because I let my emotions get in the way.  This is a very low probability of success choice.

Principal #4 –   Trade in the direction of the Trend

Trading with the trend is much easier than trying to pick tops and bottoms.  Trends offer traders the opportunity to stay with a trade much longer than merely trying to take a couple of points out of the market because they picked a minor top or bottom.  Bragging rights for top and bottom pickers will eventually cost them their accounts.  When I’ve met somebody that likes to try and pick these tops and bottoms. my experience has been that more times than not they also have a very large ego.  As we have said before, there is no place in the market for ego.  Let me mention here that using support and resistance levels as turning points do not necessarily make you a top and bottom picker.  These can be logical turning points.  People who try and pick turning points based on a bias, opinion or the phrase “it just felt like it should turn” are the ones who are in trouble of blowing out their trading accounts.

Entering a trade in the direction of a trend can be much more forgiving than countertrend trading.  With trend trading you have the momentum of the market in your direction to help if you get in a little too early or a tad late.  When countertrend trading, you have to be very precise with your timing or you will take some very quick losses.  Trading with the trend allows for a better risk/reward.  You will be in the trade for a longer period of time to capitalize on what the market has to offer.

Principal #5 – Define your setups and stick to them

Much like Principal #1, we must identify what setups work best for us.  Each trader will have certain styles that they are comfortable trading with.  In your trading plan you will identify your style of trading.  Are you going to trade with Support/Resistance?  Are you going to be a breakout trader?  Are you going to use indicators?  Or perhaps you are going to use a combination of the above.  The important point here is that you identify your choice and stick to it.  Many times a trader will get into a trade and hear another trader say for example, “Stochastics is really overbought!”  You may have never looked at this indicator before, but you flash it up on your screen and now you start thinking maybe you should exit your long position because you see it is overbought.  Of course you then exit the trade and it continues in your direction for a handsome profit without you.  This is like trading by the seat of your pants.  Had you done some research on stochastics and were very comfortable using it, then perhaps you could use it to help you identify your exit.  If you do choose to use this indicator, or any other method, just make sure you have tested it and you have written in your trading plan that this can be one of the criteria you will use to exit your trades.  If it is not in your plan then you should not use it.

Next week I will discuss five more principals to help make you a well- planned consistent trader.

“Accept responsibility for your life.  Know that it is you who will get you where you want to go, no one else.”  Les Brown

Don Dawson

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.