Seven Deadly Trading Mistakes - Part Two
In part one of this series, we looked at the problem of
continually switching trading strategies in the hope of finding
something better, and why that can never bring us long-term
success in our trading.
In this second article, I'm going to talk about a closely
related problem many traders suffer from - a lack of planning.
Mistake Number Two - Not Having a Trading Plan
"If you fail to plan, then you plan to fail". I don't know who
first said that, but it's a very sound piece of advise indeed.
Planning is something that is all too often overlooked by
traders, and yet a well drafted trading plan is one of the most
important tools for success and profit.
In talking to struggling traders, I am constantly amazed at not
only how many don't have a trading plan, but how many don't even
know what such a plan is. In fact a trading plan is quite
simple, it's a document that details every aspect of your
trading strategy. It is literally a blue-print for your trading
methodology.
What should be in this document? Here are the most important
areas it should cover:
- Mission Statement - A defined objective for your trading; if
you don't know what it is you are trying to achieve, how will
you know when you have achieved it? Having a well defined goal
is essential to success in any venture.
- Pre-market preparation. Actions required before the market
opens, setting up for the trading session, reviewing economic
calendars, and so on.
- Trade enty rules
- Trade exit rules
- Money management rules
- Post market actions - trade logging and analysis.
As anyone who has traded in a live market knows, we must often
overcome our natural emotional responses in order to execute our
trades correctly. Cutting losses and letting winners ride can be
easier said than done. By defining as precisely as possible, our
criteria for entering and exiting trades, we have a reference
that we can use to help us overcome these responses.
The trading plan should be kept at hand throughout the market
session. When we see a possible entry coming up, refering back
to our strict written entry criteria we can objectively look at
the chart and make a informed decision about whether to enter or
pass. The same applies to exiting, whether the trade is winning
or losing. Over time, trading becomes almost mechanical and
stress-free.
Action: We must have a written plan that defines all aspects of
our trading, and we must commit to following it to the letter.
Only by ridgidly sticking to our strategy can we honestly
determine if any problems in our trading lie within the system
itself or within our execution.
In Part Three, we'll have a look at one area of that trading
plan outline in more detail - money management - and how
position sizing can lower risk and increase profits.