use of a trading plan and the attendant postmortem technique. I am going
to go into detail about this technique and will show real examples of trading
plans.
Traders lose money mostly from making stupid mistakes. They forget
to put in the stop because they will do it tomorrow. They don’t know the
right contract size. They like the way the stochastics are acting but completely
ignore the breakdown on the chart. And so on. In other words,
they simply forget to take a look at something that they know they should
look at.
I think that the two main reasons for not looking at something that you
should are:
1. Not paying attention due to a busy schedule or not caring
2. Not wanting to confuse your opinion with facts
I firmly believe that the consistent use of a trading plan will overcome
these two problems. I further believe that the trading plan is the second
most important part of a trade, after money management. The actual entry
and exit techniques are secondary. Most traders will find this statement
hard to accept but most profitable traders, even if they do not use a trading
plan, will agree with me. There are several reasons why.
Without proper monitoring of information, you will drown in a flood
of information. With a trading plan, all the relevant fundamental and
technical indicators can be stored in one spot. It will allow you to outline a
scenario of the expectations for the future. In addition, it provides a place
for the exact entry and exit points to be delineated and necessary money
management principles to be applied.
One of the important features of the trading plan is that it is devised
before the money is risked. Traders are typically far less emotional about
a trade before the money is committed. Typically, traders lose their objectivity
when they are on the firing line and money is committed.
The trading plan also helps to educate you. After a trade, you can go
over your trading plans and evaluate what actually happened. This is called
the postmortem. You have an opportunity to examine how accurate the
pretrade analysis was and discover areas of weakness in your own education
or insights. Often, investors will realize that certain facets of their
trading technique have been over- or underestimated. They think that a particular
technique is doing well when, in fact, it is doing poorly. Traders can
refer back to the trading plan while in the trade to determine whether
things are going as planned and whether there have been significant
changes that will affect the analysis that led to initiating the position.
The trading plan thus becomes a rudder for the average speculator, who
tends to trade like a rudderless ship. When investors are forced to commit
thoughts to paper before initiating the trade, their thoughts must be
more logical and coherent. The record of the thoughts before the trade is
initiated provides a useful insight for future growth.
The use of a trading plan is also a viable way of reducing mental fatigue
and anxiety. The trading plan is a record of the thoughts of the trader
before the trade is initiated. It represents a calmer, detached state of mind
than will exist when money is on the line. Traders who have committed
money based on a rational trading plan will be able to refer back to that
trading plan and use it as a touchstone of calm.
Source: How to Make a Living Trading Foreign Exchange: A Guaranteed Income for Life (Wiley Trading)
