John Wooden, former coach of the UCLA basketball team, once said, “Failing to plan is planning to fail.” This is even truer when it comes to trading. So many traders fail because they do not have a planTweet: So many traders fail because they do not have a plan http://ctt.ec/dw_Tn+ that they follow for their overall trading or even on individual trades they take.
A trading plan is a necessity for traders. Many people feel that they can trade without one or that it is too tedious to write one. Those are the people who usually struggle to become successful traders. One of the biggest barriers to trading success is a person’s emotions. It is natural to experience fear and greed while putting your capital at risk. However, by following a written plan, you are more likely to minimize those emotional effects on your trading and can remain more objective in your analysis of the markets.
Having an overall trading plan that details how we will trade and protect our capital is critical. If we are not trading well, we need to know how to fix it. By having a plan, we have a base on which we can identify the problem and fix it. Without the plan, we would not know what we were doing wrong. More importantly, to duplicate successes, we need to know what we did to find that success!
In the Online Trading Academy Pro Trader Course as well as the Extended Learning Track Class, we emphasize the need to have a complete trading plan (just like a business has a business plan), as well as a plan for every trade you will take. The two part plan is a way to remove the emotions from your trading and force you to objectively look at all possibilities in the market. We must create the trading plans before we have an open position so that we do not have a bias or emotion attached to the market.
Part 1 of a good trading plan should have several key parts to it. The first part is identification of your goals and motivations for doing the trading. The first response to this from most people is that, “I’m doing it to make money!” While this is true, it is not enough to motivate a person when their trading gets tough or they hit a rough spot.
Noting your true reasons will have a larger impact on you to lift your spirits and motivate you to succeed. Reasons are different for every person but some may be:
- To supplement my traditional job income with trading
- To ensure I can pay for a great college education for my children
- To take care of my parents
- To enjoy a better lifestyle for my family
- To retire earlier/better
The next element should detail your risk and money management. You want to be specific here. Write down how much you will risk per trade and per day. Keep the amount small in comparison to your full amount in your account so that you do not damage your account with a bad trade. Remember, if you lose $1000 on a $10,000 account, that is going to be very damaging both financially and mentally as you are likely to be more nervous or revengeful in future trades.
You then need to identify the amount of time that you will dedicate toward your income or wealth creation. Most people wrongly think that they must spend hours scanning and reading charts. This is actually counter-productive. You want to work smart but not long hours. In Online Trading Academy’s courses, we show our students what time allotment they should expect for trading and investing in all of the asset classes and how to maximize their use of time while trading or investing.
For the last element of part 1, the trader needs to select the asset class or classes they will use in order to generate their income and/or wealth. This creation of a trading plan begins at Online Trading Academy as soon as a prospective student first meets with their Education Counselor and continues throughout their involvement with the OTA trading community.
Once this first part of the trading plan has been completed, the trader/investor needs to work on their trading plan for each individual trade they will take. Having a plan prepares us for trading. Being prepared is something we all must do as traders. We do not know whether the markets will go up or down. Sure we can anticipate the most probable direction, but a trader will never be 100% sure. So, how can we protect ourselves against inverse market moves? Simple: be prepared!
Preparing for the markets involves identifying any possible dangers that may confront our positions. I see too many students who are new to the markets focus too heavily on the possible profits the trade may offer them. Professionals and those who will last long-term focus on the risk of the trade and look for all possibilities. The best way to do this is by having a plan prepared for your trade prior to entering it.
In the first element in part 2 of the trading plan, the trader should look for reasons as to why this is a suitable trade to enter. Usually this is the easiest section for the trader to complete as we all want to trade and it can be easy for us to rationalize why we should enter. Be careful to make sure they are valid reasons such as technical analysis, fundamentals and related markets.
Now the hard part begins. The trader needs to start listing the negative factors that may work against the trade. This is where you have to find the dangers that could increase your risk of losing. We don’t want to think about being wrong and typically have a mental block that prevents us from seeing the danger or causes us to rationalize it. Look objectively at the markets and decide if there are dangers. List them to remind you to be aware and prepared for them!
Once you have the factors identified, it is time to write out the plan. Locate supply and demand levels, the desired entry point, target area and where you will place your stop. The entry, exit and target will be determined by using the tools and tactics you listed in part 1 of your trading plan. You should then write out your trade. Be specific! Write out your entry and type of order to be used. Detail where and when you will place stops.
By completing this trade plan you accomplish several things. You have accountability if you violate the plan and can build discipline. But you also build confidence when you follow your plan and you either make money or lose very little when things don’t work out as you had planned. By preparing the trade plan, you prepare for surprises and will not be shocked into large losses when the market makes a volatile turn.
To build consistency, you also need to detail out your trading strategies. You should include the exact set ups you are seeking and list the specific criteria that would signal your entry into the trade. Being more specific may limit the number of trades you can take but will also make sure you are taking only the highest quality trades. This is why we teach the odds enhancers in our courses at Online Trading Academy. We want to be as selective as possible with our trading.
There are many more details that go into a trading plan. I have listed some of the major points here. To learn more about how to create a plan for you, attend one of our courses and learn the tools that successful traders use to make consistent profits from the markets.
Written by Brandon Wendell, Online Trading Academy instructor. As a former stockbroker, brokerage trader, and hedge fund trader, Brandon brings various market views and insight to his trading classes such as the Forex trading course and lectures on advanced futures trading, options strategies and more. He has held NASD securities series 7 and 63 licenses. An Online Trading Academy graduate himself in 1998, Brandon has been trading equities, options, forex, and futures in his own account ever since. Brandon taught for Online Trading Academy in 1999 to 2001 before becoming a Realtor and commercial mortgage broker and also managing a venture capital firm. Returning to the Online Trading Academy family late in 2005, he now balances trading, teaching and a real estate career. Brandon is also the San Diego Chapter Chair of the Market Technicians Association and holds the Chartered Market Technician Designation. Brandon has appeared as a guest on CNBC, Bloomberg TV, and Fox Business Channel. He has conducted special seminars for CNBC staff on technical analysis of the financial markets. Brandon has published articles in The Trader’s Journal, Forex Journal, Investor Magazine, and Investor’s Business Daily. Brandon has also appeared as an industry expert speaker at the Trader’s Expo, The Money Show, and Asia Traders and Investors Conference.