Thursday, June 12, 2014

Your trading plan - the bridge from dreams to reality

"A plan is a bridge to your dreams. Your job is to make the plan or bridge real, so that your dreams will become real. If all you do is stand on the side of the bank and dream of the other side, your dreams will forever be just dreams." Robert Kiyosaki

I would guess that if you asked a large sample of traders how many of them actually had a written out trading plan, then probably 90% (if not more) would say no. In truth, all traders require a plan. I could pretty much guarantee that all successful traders have such a plan.

Having a plan, particularly if it is committed to paper, is one of the most important things you can do.

It forces you to consider a number of factors surrounding your trading:
  • It helps define what your objectives and long-term goals are;
  • It forces you to commit to paper the elements of any particular strategy you will be using (entry and exit parameters, stop methodology);
  • You should define your preferred timeframe, the markets you will be trading etc;
  • Most important - you need to determine your risk parameters, both in terms of each individual trade and overall portfolio heat;
  • Your plan should include a summary of your strengths and weaknesses as a trader. Then, you can use the plan to help you address any of those weaknesses, perhaps with the assistance of an expert;
  • It is also beneficial to have some shorter-term goals or objectives to act as staging posts on the way to achieving your ultimate or longer-term goals;
  • You should also factor in a disaster recovery plan (for example - if you are a short-term/day trader, what is your plan of action should there be a power cut, or if there is a major price shock, what will be your approach to dealing with your current holdings).
A well written plan will help you determine what elements are important in working towards your objectives. You may realise that things you spent a lot of time concentrating on were less important than other aspects which you gave little or no consideration to. Such an example would be to find that you concentrated solely on your entry technique, when your risk control was poor.

Part of having a plan means carrying out regular reviews to ensure that you have not deviated from your plan. The review needs to be done as unemotionally and objectively as possible. This should include maintaining a log of all trades taken with performance metrics, but ideally also some form of record noting your thought processes and emotions from day to day, or maybe even trade to trade. 

This recording and review element is a critical part of the overall process, as any issues identified and highlighted may mean you avoid making the same mistakes going forward (which would then fall into self-sabotage territory). Or, it may also mean that part of your original plan is deficient in some way and needs to be addressed.

One under-rated aspect of having a plan is to demonstrate to friends, family or loved ones your commitment in working towards your goals. Hopefully, you will be able to gain full support from those closest to you. You should encourage them to take an interest in what you are doing - they may also act as a no-nonsense partner when it comes to reviewing your overall performance and adherence to your plan.

When you create your plan, it needs to be almost stretching incredulity, without being delusional. You can't set out a plan to say you will start with £10,000 and within a month's time you will be a millionaire. By the same token, you don't want to set yourself a goal that is easily attainable. You want to stretch yourself, and make it worth your while for the time and effort you will be committing to the project.

With trading, the ultimate goal may not be solely monetary based. Some people will focus on the process, and their goals will reflect that, and the outcome (being profit and an increase in wealth) be a by-product of following their plan. As with all things trading, you need to be disciplined, committed and patient in following your plan.

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