Becoming a Better Trader: How to Construct a Trading Plan
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Today, we discussed a very important aspect to trading – having a trading plan. Just like anything we set out to do, having a trading plan is imperative for setting one’s self up for success. It doesn’t need to be a book, but it does need to cover a few key topics. The following are the important points we discussed and should be in every traders trading plan.
Most paramount is having a sound set of risk management rules. This pertains to not only each individual trade but also the entire account. Knowing how much you are willing to risk per trade and being able to fully accept the risk helps alleviate stress often caused by over-sizing a trade. So know your risk tolerance. You need to also have a plan for handling multiple positions – how many is a max and how much total risk will you take on all positions combined. Knowing how each trade is correlated is important here for helping determine your overall risk. You have to assume all trades could turn into losers, so what is that total amount you are willing to lose?
Know your toolbox and the types of analysis you will use. The acronym I like to use is K.I.S.S. Many of you are probably familiar with what it stands for, but for those who aren’t – Keep It Simple Stupid. Keep your analysis as simple as possible, but not so simple it isn’t realistic. Meaning, you want to use a select number of tools or methodologies which don’t have redundancies. Too many forms of analysis can cause paralysis by analysis through mind-clutter. So, know how you identify trades, and keep it simple.
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Identify your favorite trade set-ups and stick to only those. Knowing what kind of set-ups you best execute is important to consistency. Take snapshots of trades which worked out for you, and even those which you find a pattern of not working out. File them away and review them to keep yourself focused on only those set-ups which work best for you.
Have a plan for handling both adversity and success. Have a circuit-breaker in place in the event losses start to pile up. If you start having a material draw-down you need to stop the bleeding and figure out why you are struggling. It could be poor trade mechanics or it could be a market environment not conducive to your style of trading. It’s a good idea to step away from the market when going through a tough period. It helps clear your head and allows you to figure things out while not in the heat of battle. And don’t worry about missing the next ‘big’ trade, the market will be there when you return.
When doing well, there is a tendency to become overconfident and become overly aggressive. You want to have a plan for keeping yourself in check, because if you don’t that good period of trading will turn into a bad one. Going through trades and making sure you are executing them well is a good idea. Keeps you focused on the process and pointed in the right direction.
For the full conversation, please see the video above…
---Written by Paul Robinson, Market Analyst
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