Why you need a Trading Plan
Whether you are Trading in Stocks, Options, Forex or Futures, everybody who is Trading in the Markets wants to make big money. It doesn't matter if you are new to Trading or you are a seasoned Trader, one thing all successful traders will need, is a written Trading Plan. Quite simply a Trading Plan is a plan to help guide a trader to achieve his or her goals.
A Trading Plan must have Goals
The truth is about 3-5% of people have a written plan to achieve their goals. There was a very famous study conducted in 1952 on the top graduates at the Yale University, which concluded that only 3% of Graduates that year had written down their Goals. Twenty years later they resurveyed the same Graduates, and the same 3% that actually had written down their Goals, had more Wealth than the other 97% of Graduates combined. So is it any wonder many people fail to make any significant inroads into achieving their goals, if so few of people write them down.
A Trading Plan will not only contain Goals but must also help you with making trading decisions. It must define a system or method that you can execute consistently to Enter & Exit positions and help you to continuously improve. It will also help with dealing with emotional reactions to Fear & Greed, so you can make more rational decisions quickly during the emotional roller coaster that trading can deliver. Traders that don’t have a trading plan often trade from the gut and are always making crucial decisions while being affected by either Fear or Greed. These emotional influences can cause Traders to struggle with their ego and affects execution, some of the most common problem are:
Top 10 problems of Option Traders
- Not pulling the Trigger
- Not taking your Losers Quickly
- Letting most of the Profits Slip Away
- Small Profits & Large Losses
- Hurt by Adverse Market Moves
- Hyper-trading or Over-trading.
- Reacting based on Fear & Greed
- Psychologically Drawn Down
- Information Overload
A Trading Plan help you deal with Fear and Greed
All of these, as you can see, are tied to Fear or a Lack of Fear (Greed). So having a system or method which pre-defines your actions helping you keep a clear minded to make decision and take action. So if all your methods or system are pre-defined in your plan all you have to do is be disciplined and follow your plan.
Your Plan will also help you specify how much risk you will take on board, so you go not get to greedy and load up on any one trade. It will define how you prepare for a days trading, so you can be a Pro-active Trader rather than a Re-active Trader. So rather than just rolling out of bed and searching for new trades during the day, you can have a handful of pre-qualified setups which you can execute upon, depending on if they behaving as you expect.
I hope you found this information helpful, and be sure to stay tune for my next blog post on “ What is in a good Trading Plan”.