"If the base of your trading was built on weak grounds, it is not a matter of if you fail but when you fail."
This lesson is all about the importance of planning your trading. It will teach you how to make a plan to suit your personality, how crucial it is to keep a trading log, and a bit about the psychology of trading and the four types of traders in the market. This will allow you to better understand what sort of trader you are, or will become.
This lesson will also introduce you the key topic of risk management and stop losses.
The one thing that really helps inconsistent traders to become consistently profitable traders is a solid trading plan.
A trading plan is a very simple document, a piece of paper or card on your desk that gives you a list of exact rules that you are allowed to trade by. It defines what you can do, when you can do it and how you should do it.
It doesn’t have to be too detailed, but it should at a minimum cover several key components:
- Entry and exit rules for trades,
- Risk / reward (where your stop losses and take profit targets go),
- What you need to be wary of.
Often, a trading plan might look like a series of diagrams and example charts with a set of rules and a checklist for entering a trade depending on the strategy.
The point of a trading plan is to add discipline to your trading, to remove some of the emotional subjectivity and to ensure that you follow the rules you know work for you.
Your documented plan will change and adapt as you learn more and change your style accordingly. Throughout this course, you will probably add to the document, change it and modify it. But for now, the most important thing is that you must ensure you have that document, be it on a piece of paper (even if it’s currently blank), an accessible document on your computer’s desktop or even a tattoo on your hand. Just make sure you have something.
If you already have a strategy, then you can complete a draft of this document now (and congratulations: you are already better organised and have more chance of success than most retail traders).
This trading plan document should be a roadmap to trading, defining what you do and how you trade, so treat it well. Make sure it stays by your side at all times, and never trade without it.
Finally, two rules about a trading plan:
- Don’t ad lib - if it’s not on the plan you can’t do it!
- Don’t make it up – nothing goes on the plan until it’s been tested thoroughly!