When most traders think about making profits in trading and investing, they usually focus on market timing methods or what to do based on certain news releases.
While market timing is extremely important in order to minimize risk exposure and maximize profit potential, it will not help the trader or investor who trades without a well thought out plan.
One of the most common problems that traders face is that of HOPE.
Now, I’m not saying there’s a problem with having hope. Who doesn’t ‘expect’ their trade to be profitable?
What often happens, however, is that a trade doesn’t start as expected, and the trader finds himself in a position where he has to make a decision, only to be completely controlled by HOPE. All reasoning disappears once the trade starts to move against the position, and the ‘no plan’ trader hangs on to the position due to HOPE.
Without a proper trading plan BEFORE the trade is executed, discipline is often the first thing to go.
When the decision was made to go ahead with a trade, there had to be a good reason for it. The trader saw something on the charts, or perhaps in the news (for those who dare to use such unreliable information) that suggested that taking a position would probably make a good profit. This would also be the time to decide what to expect from the trade and what to do if the market does not provide what is expected.
All of this MUST be done BEFORE executing the operation!
The disciplined trader would have all of this in writing. Items to list would be the ENTRY price zone, the target price if there is one (not all trades need a target if there is a plan on how to track the trade with a stop-loss order), and what conditions would signal an immediate exit. of the trade, such as the price breaking below a certain price level.
Where the plan really shines is during the early stages of the trade, when the market has yet to move deep enough into profit territory to warrant a tightening stop-loss.
During the initial stages of a trade, the risk of loss is greatest. The trader ‘with a trading plan’ knows this and has already determined at what price the trade would be considered to trade outside of the initial expectation. The trader would wisely place a stop loss order at that level and under no circumstances remove it except to move it further in the direction of profit.
Without the trading plan and the discipline to stick to it, the trader may find that the trade moves into the exit price zone only to start ‘hoping’ it will be short and the market will soon turn around and all will be well. with the world
Most of the time, this does not happen! The trade continues deeper and deeper into losing territory, and the trader simply cannot accept such a loss, so he continues with the “hope” that he cannot continue for long and hangs on instead of getting out. Eventually, the pain becomes too much and the trade is eventually exited (unless the account is cleared, which makes the exit automatic), only to then see the market finally turn around. This is very devastating to the trader’s psyche!
If you are going to trade, you must accept manageable losses as part of the process. You must be willing to write your trading plan with your exit strategy clearly stated. You must be willing to follow that plan you wrote ‘with a clear head’ to the letter, no exceptions.
One of the best lessons I have learned in my 30 years of trading came from writing and following (or not) my trading plans. I learned where the weaknesses were in my plans and had something I could look at and improve. It helped me build a stronger ‘will’ and determination, strengthening my discipline muscles along the way.
So if you have a trading method that you believe is good for profit, getting into the habit of making a trading plan and following it will tell you sooner rather than later whether your belief is well founded or needs to be modified. A trading plan is really that good!