Article Surfing Archive

In part one of this series, we looked at the problem of continually switching trading strategies in the hope of finding something better, and why that can never bring us long-term success in our trading.

In this second article, I'm going to talk about a closely related problem many traders suffer from - a lack of planning.

Mistake Number Two - Not Having a Trading Plan

"If you fail to plan, then you plan to fail". I don't know who first said that, but it's a very sound piece of advise indeed. Planning is something that is all too often overlooked by traders, and yet a well drafted trading plan is one of the most important tools for success and profit.

In talking to struggling traders, I am constantly amazed at not only how many don't have a trading plan, but how many don't even know what such a plan is. In fact a trading plan is quite simple, it's a document that details every aspect of your trading strategy. It is literally a blue-print for your trading methodology.

What should be in this document? Here are the most important areas it should cover:

• Mission Statement - A defined objective for your trading; if you don't know what it is you are trying to achieve, how will you know when you have achieved it? Having a well defined goal is essential to success in any venture.
• Pre-market preparation. Actions required before the market opens, setting up for the trading session, reviewing economic calendars, and so on.
• Trade enty rules
• Trade exit rules
• Money management rules
• Post market actions - trade logging and analysis.

As anyone who has traded in a live market knows, we must often overcome our natural emotional responses in order to execute our trades correctly. Cutting losses and letting winners ride can be easier said than done. By defining as precisely as possible, our criteria for entering and exiting trades, we have a reference that we can use to help us overcome these responses.

The trading plan should be kept at hand throughout the market session. When we see a possible entry coming up, refering back to our strict written entry criteria we can objectively look at the chart and make a informed decision about whether to enter or pass. The same applies to exiting, whether the trade is winning or losing. Over time, trading becomes almost mechanical and stress-free.

Action: We must have a written plan that defines all aspects of our trading, and we must commit to following it to the letter. Only by ridgidly sticking to our strategy can we honestly determine if any problems in our trading lie within the system itself or within our execution.

In Part Three, we'll have a look at one area of that trading plan outline in more detail - money management - and how position sizing can lower risk and increase profits.