Jan 23
Trade your plan, plan your trade.
The overwhelming majority of rookie traders enter the financial markets unprepared, uneducated.
And what could be a worse idea than entering the market without any preparation and understanding if you compete against the sharpest minds and most sophisticated algorithms?
Consider agreeing to a cage match against a champion with no prior preparation, do you believe you have a chance to win?
Probably not, isn’t it?
More than that, in combat sports, you have weight classes, in trading, this is not the case.
To begin, it should be understood that the three primary reasons why most traders fail at being profitable are either losing strategies that have never been back-tested on a large sample, poor emotional/psychological behavior toward their trades [self-sabotaging], or a significant lack of risk-management application and understanding [we can add trade execution].
These three reasons can be combined into one: a lack of discipline.
“Where do I get the money I make from my trades?”
The answer is simply from the accounts of other traders, and those other traders have no incentive to give you their money, right?
As you read this, these people are already putting together their trading plan in order to take money from other traders and/or save their money from you.
In and of itself, a lack of knowledge is not the primary reason why beginner traders fail.
You can dive down the technical analysis rabbit hole, master every single trading strategies and indicators and still lose, since there are many more components required to be a profitable trader.
As previously stated, managing your risk, emotions, trade execution, and trade management are all important components to be profitable.
And, once again, it all comes down to discipline.
The trading plan
Before you begin developing your plan, you must first understand what it is all about.
Because all of your thoughts are expected to remain objective and follow a specific strategy, the trading plan assists you to remain calm during the trading process.
When trading, an experienced trader who has developed a trading plan will be relaxed, whereas a trader who does not have a plan may be nervous and worried if things do not go his way right away, which can lead to irrational and impulsive behavior and, inevitably, trading losses.
To be clear, no trading plan can guarantee you will never lose money.
Its sole purpose is to provide a logical structure to your trading process so that you can remain as objective about the market.
The trading plan allows you to be more selective about the positions you take and to maintain a stable, serious and professional emotional state regardless of market behavior.
Again, losses are part of the process, it’s the cost of doing business.
“It’s not whether you’re right or wrong, but how much money you make when you’re right and how much you lose when you’re wrong.”
― George Soros
I – Introduction of your plan
- Psychological aspect:
- Why are you in trading?
- What role does trading play in your life?
- What are your goals?
- Do you have any knowledge about trading?
- Your psychological profile?
2. Trading aspect:
- What market do you trade?
- What timeframe are you working with?
- What trade setup do you use?
- What are your entry & exit rules?
- What are your risk management rules?
- What are your back-testing data?
II – Strategy
Trading strategy is entirely arbitrary.
Some folks are just focused on price action.
Others use technical indicators in addition, others solely utilize order-flow, whilst others use everything at the same time.
Your trades should ideally be supported by numerous reasons [confluence & odds enhancers] to take them and have an asymmetric risk-reward.
You can analyze the market in many ways, in any case what will make you profitable is your discipline in various aspects of trading.
However, the risk-reward of your trade is not enough.
You must first know if your strategy is a winning strategy.
How?
By back-testing or forward-testing and gathering data.
Because, yes, even if you have a trading strategy that allows you to get high RR trades, it is useless if your average win-rate does not allow you to grow your portfolio.
Often cases, novices will try a trading strategy and then, if they do not achieve the expected results after a few trades, they will abandon it in favor of a completely different one.
The development of a flawless strategy should be avoided; there is no such thing, and you will always be prone to losses.
Accepting risk & losses is a very important psychological shift.
If the back/forward testing of your strategy reveals that the performance is insufficient relative to the average RR & win-rate, it is possible to adjust or improve it in order to develop a winning methodology over time.
There is no need to start from scratch. Back/forward testing takes time.
To evaluate a strategy’s overall performance, expect at least hundreds of trades.
III — Emotions
Dealing with one’s emotions is one of the most difficult challenges for traders.
Doubting yourself when it’s time to exit a trade with a sufficient profit, or thinking that you’ll have to cut your losses and hope the price rises again, are bad habits to break.
Stick to the plan because it is there to guide you.
Your take profit is your target, and your stop loss is your escape route; if either is reached, you must act appropriately and always stick to your plan.
A useful habit to develop is to document each of your trades in a trading journal; there are automatic ones, such as CMM or Edgesheet, but you can just as easily type everything down on Excel or on a notebook.
Most of the time, when you have a profitable approach yet lose, the problem is you.
The issue isn’t the market or your strategy; it’s you.
Your losses are the product of self-sabotage.
It happens to everyone, sometimes emotions get the better of us, and we make big mistakes.
The main thing is to always want to progress, to move forward, and learn from your mistakes.
As a trader, you must constantly monitor your emotional and mental state.
Easier said than done, for sure. Introspection is key.
Remember to be patient, persistent, and to keep a positive attitude at all times.
Trading is a challenging activity that necessitates a great level of discipline, consistency, and professionalism.
It’s a profession that only rewards the best, there is no room for mediocrity.
You must first establish your mental capital in order to manage trading.
Mental capital is a psychological concept that includes traits such as self-efficacy, optimism, and resilience.
Skip the motivational quotes and all that crap and start working on this part.
Trading is a psychological warfare, so gear yourself accordingly.
Many people are excellent analysts but bad traders for a variety of reasons.
Learning & understanding is one thing, but applying and executing properly is another.
I’d love to discuss execution, which is a critical component, or go more in depth when it comes to risk-management, but that may have to wait for another article.
Again, we are humans, subject to flaws, no one is perfect, don’t beat yourself up too much.
Look at me; I consider myself disciplined, but I still made one of the biggest mistakes ever in trading: I’ve been going against the trend for the last few weeks.
Missed some good opportunities, but that’s the nature of the game, right?
Sure, my ego got the best of me, too stubborn, and I wasn’t being objective.
Taking notes & moving on.
The market will always find a way to humble you, it’s all about having mental strength, surviving and building back even better.
Keep learning, keep striving, keep grinding.
