Thoughts on trading plans.

When I speak about the need for a trading plan it is not because I got it right the first time. I did not have a plan I just did it.  I was told I needed a plan but at that point in my life I was always the exception.  I lost time and money because of it. I keep preaching about a trading plan because I believe it is the “easiest” way to develop into a better trader.  A plan forces you to make thought out decisions and you know why you are doing what you are doing and can adjust.  Knowing why you are making and losing money is important in trading and there is no way to accurately decipher this without a plan.

Rules Applied to a Strategy = Trading Plan 

At E-mini Executors that is how we define a trading plan.  A trading plan does not say buy here or sell there.  It is a foundation on which to execute a trade and adjust to changing market conditions.

Why is a trading plan important.

  • Takes the pressure off–  you become a more efficient trader when you remove yourself.  Although I am sure algo’s are getting better your brain is always going to make a better trade than a computer.  I should clarify, a clear brain will always make a better trade.  Your goal should be to react more than make a decision.  You can react because you know why you are taking action and what you are risking. You have also taken on the responsibility to change if necessary.
  • Repeatable- once again, anyone can put on risk and get lucky. If you want to make a trading a career you have to bring it on every trade.  That does not mean you win on every trade but it means that your next trade is better than the last. You know more about yourself, the market, and the relationship between the two.
  • Confidence- if you lose on a trade and do not know why, how can you ever expect to get that money back.  Yes over the course of trading everyone makes a mistake or get caught on news but every trade cannot be a mistake.  If you do not have a plan to improve or know how to improve you are never going to be able to take a trade with confidence.  A trading plan is the light at the end of the tunnel when you are suffering losses.
Trading Rules
  • The purpose – a good set of trading rules promote growth they do not create limitations.  Not trading during x period of time is not a rule, it is a limitation.  Do not get me wrong there are times when you need to limit yourself but that is not all times.  If you have a plan, you will be able to understand when you are most at risk of trading poorly.  Eventually, you can work through it.  Sometimes all it takes is being aware of it.
  • Simple- They need to be simple.  They need to hang over and direct all of your actions.  The only way you are going to remember and use them to your fullest ability is if you can understand them.  Rules are more simple than limitations.
  • Must apply– Rules or a trading plan are only as good as your ability to apply them.  Once again, you have to believe in them, you have to make them your own.
  • Cohesive- All rules needs to eventually act as one.  Each rule dependent on another.  This will make it easier to follow and understand which one you are breaking.  This also makes the application easier.

Strategy

  • Adaptable- a strategy must be able to adapt to a changing market.  It must also be able to adapt to your internal changes.  If nothing changes there would be limited chances for profit. Every trader must root for changes but it does not matter if you cannot adapt.
  • Definable- there are times when you need to override your strategy but that happens for less frequently than we think.  A majority of your trades you should have a definite reason for a action.
  • Quickly explainable– if you can’t explain your strategy or reason for a trade in a minute or less it is probably too complicated.  Until you fully understand your strategy a majority of your “indicators” are just putting a band-aid over a gaping wound that is your lack of understanding.
  • Personal- You are an input into the way you execute.  You cannot be something you are not.  Do not get me wrong there are things about yourself that you need to bend to trading but strategy should not be that one.  It is hard to fake being tall and expensive to be a type of trader you are not.
I am not saying a trading plan will make you a successful trader, there are other factors.  It is a necessary first step.  You need a trading plan to consistently and confidently execute.  Your trading rules should answer whatever questions the market asks you.  Originally I made the mistake of planning out my trades, for example.  If the market does x I am going to do y.  Well when I was creating that plan that was what was working.  When I started to apply that plan the market had changed. That is why many probably scrap their plans or do not work on them in the first place.

You are either a system trader or a discretionary trader.  Each has it’s own equity curve and set of responsibilities. Below are some videos that you will find helpful.

What is a trading plan.

What I changed to become successful.

 

The business of trading plans.  via Abnormal Returns

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  • Cynthia

    Hey Eli:

    I would suggest that you have trading plan so you can act rather than react. To act is to make a conscious/mindful decision. To react is a knee jerk response to an external stimuli. If you have as solid trading plan it helps you act.  If you don’t have ad trading plan you will react to Mr. Market and he’ll own you.

    Cynthia

  • Anonymous

     “Not trading during x period of time is not a rule, it is a limitation”.  good way to state it, enjoyed the post

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4 Responses to Thoughts on trading plans.

  1. […] Why a trading plan is important.  (TraderHabits) […]

  2. Cynthia says:

    Hey Eli:

    I would suggest that you have trading plan so you can act rather than react. To act is to make a conscious/mindful decision. To react is a knee jerk response to an external stimuli. If you have as solid trading plan it helps you act.  If you don’t have ad trading plan you will react to Mr. Market and he’ll own you.

    Cynthia

  3. Anonymous says:

     “Not trading during x period of time is not a rule, it is a limitation”.  good way to state it, enjoyed the post

  4. […] Trader Habits – Thoughts on Trading Plans […]

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