It is said that every trader has the same chance of being a successful trader. That begs the question why it is, then, that only a small percentage of traders are successful? It certainly isn’t the capital required; while it helps to have more capital, obviously, it is a fact that if it is adjusted correctly the percentage gain will likely be the same. So what else could it be? Is it, for instance, insider information? Maybe; but you have to remember that the traders who tried to trade based on insider information have ended up behind bars. So what sets a successful trader apart from the majority?
Again, and Again…and Again
One word that should feature high in your mind as a trader is ‘consistency’. Successful traders achieve this by having a trading plan that they stick to no matter what the market throws at them. Of course this is easier said than done, but practice makes perfect. So what is a trading plan?
You will probably have heard traders mentioning their trading plan pretty frequently – but very few actually disclose what the details of the trading plan actually are. Essentially, a trading plan can be broken into three segments, to answer three important questions every trader must ask themselves:
What do I trade?
The answer depends on the characteristics of the individual trader.
How do I trade it?
Every trader will have a preference towards one form of market analysis over another; some will combine fundamental outlook with their own technical analysis, or will combine a number of technical indicators.
Where do I trade it?
This refers exits, entries and risk management.
The three segments combined provide the basis of a trading plan. With the help of these guidelines, a trader’s ultimate goal is to become more disciplined and systematic.
Now For the Interesting Bit – Building Your Trading Plan
Here’s where it gets interesting: no trader has exactly the same trading plan as another trader. Risk tolerance, capital and trading strategy will differ between traders. For this reason, a trader cannot expect that a trading strategy developed by another trader will work for them at 100% capacity.
Whether you are looking to develop your own trading strategy, or are looking to learn a trading strategy from someone else, it must also reflect your individual circumstances. Below is a checklist of several key actions you can take to build the right trading plan for you.
1. Keep a trading journal
Keeping a trading journal builds up discipline.
There will be no more excuses – you will know what happened, how, and when. It will reveal information in regards to your trading pattern that you didn’t realise earlier.
2. Determine what and when to trade
Keeping the trading journal will help you pinpoint when you could have done better.
Every tradable instrument has a specific time when activity picks up.
It will help you to identify the instrument that your trading strategy works best with.
It will help you to identify simple trading mistakes that are sometimes overlooked/ underestimated.
3. Pick a trading strategy that is closely aligned to step two and suited to your risk tolerance.
This can be self-developed
4. Always remember to consider the question: “What if… the trade doesn’t work in your favour?”
Determining exits – both stops and targets are crucial to a successful trade.
Most traders ignore the need to identify exit levels, partly due to greed and partly due to fear of missing the big change and getting out too early.
A common mistake when laying out a trading plan is the thought of potential gains.
It is important to identify the risk attached to any trade, before entering it.
5. Having daily, weekly and monthly goals are likely to keep you motivated
This keeps a realistic perspective of what can be achieved and how can it be achieved.
Start with small goals, gradually increasing it once a goal has been achieved.
Diamonds Are Forever- A Trading Plan Lives And Breathes
A trading plan is not a diamond that lasts forever. It’s important to review your trading plan at least quarterly to identify trading errors and mistakes. It may save you a lot of pain. With ever changing market conditions, your trading plan needs to be fine tuned to the market. For example, a plan for a trending market will not work in a range bound market condition and vice versa.
In the next article I will discuss different categories in technical analysis and how classifying them may assist in building your own trading plan. Once again, if you have any questions, don’t forget you can always ask me via the Ask the Expert panel here.