Top 5 Reasons Why You Need To Stick With Your Trading Plan

By Yvan


Let me start this post by saying this: if you are trying to achieve your financial goals in the market, you don’t need a trading plan. But here’s an important caveat: your success (if any) will be a function of random luck. Pure aleatory chance.

Success in the market is repeatable and durable only if it’s followed by a well-thought-out process. And a trading plan outlines that process.

Here’s how central a trading plan is in the achievement of predictable long term market success:

#1- A trading plan charts your path to your trading goals

Most new traders don’t understand that trading is a real business. In fact, any activity one engages on a regular basis with the intent of making money is a business.

Every trader will say that they want consistent profits. Sure… what business owner doesn’t? We all want a reliable source of income, wealth generation, freedom from the Man… but how can you expect those from a trading business that never got properly thought out? You’re just shooting in the dark expecting that you’ll just magically hit your target.

That’s why venture capitalists will not listen to even the best of business ideas if the persons presenting them don’t have a proper business plan. Because if you can’t explain on paper what the business is about, why your strategy makes sense, and how you’re going to bring the enterprise on profitable grounds, how the hell do you expect to do it in real life?

#2- A trading plan breaks your goals down into a process

What’s your maximum risk per trade? When do you allow yourself to bump it up a little bit? What market and price pattern do you specialize in? What kind of rewards do you seek? How many times will you trade? When? Those questions (and others) are answered in your trading plan. So, there’s no place for doubt—in fact, when in doubt, refer back to your trading plan. Whether you are an experienced trader or just starting out, it should lay down the exact steps you should take on your way to your destination.

#3- A trading plan structures your trading operations

If you don’t have a plan –or if you have one and aren’t able to follow it– your actions will likely be inconsistent and random. And randomness of behavior and action give you random results.

For instance, after a loss (or a losing streak), you’ll tend to revenge trade, looking for that one trade that will make it all back. You’ll initiate your trades too early because of FOMO or too late because of hesitation… in essence, you’ll tend to be driven by your emotions. This is really the epitome of a gambler who doesn’t have a trading plan to guide their behavior.

On the other hand, those who follow a trading plan understand that market success isn’t an overnight event. Since they’ve tested their trading strategy and have devised their trading plan accordingly, they know that market success will come to them if they follow the trading rules outlined in their plan.

A trading plan helps one take a more structured approach to the market. In fact, since it is devised outside of market hours with a clear and rational mind, it is your best line of defense against market uncertainty. And it will protect you against yourself—your emotional, irrational self.

#4- A trading plan promotes confidence

As said above, your trading plan helps you understand what you are exactly looking for in the markets in terms of set-ups, risk and reward, etc. Understanding the ins and outs of your trading method forges your confidence. And confidence (in your method) makes it unlikely for short-sightedness and fear to heavily influence your trading decisions. You tend to make more objective decisions instead of reacting to your emotions.

#5- A trading plan gets you success

OK, this is not a guarantee… because nothing is in life. But a proven trading plan will make success more likely, mathematically speaking. When you have a proven trading plan, when you understand that market success isn’t an overnight event, when you can keep yourself calm and in control, your level of consistency will increase—and so will your odds of success.

The Bottom Line

Let me just conclude this short post by saying that your trading plan is not a magic wand that will make all your trading goals come true. No such thing exists, of course. Rather, see it as a tool (a very useful one) that will bring you as close as possible to your goal by charting a clearcut path for you and guarding you against your own inconsistencies.

A recurring pattern that I’ve observed amongst successful traders is that they treat trading like a business. In addition to having a trading plan, successful traders keep a journal diary and/or log, which helps them make decisions that benefit their overall performance.

Those things—a trading plan and journal—are essential parts of your approach to the market. They will provide you with a clear road map for trading so that you don’t have to hold your hands together and hope for luck.

Comments are welcome on Twitter.

 

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Memorable Lines From This Post

If you are trying to achieve your financial goals in the market, you don’t need a trading plan. But here’s an important caveat: your success (if any) will be a function of random luck. Pure aleatory chance.

Click to Tweet

We all want a reliable source of income, wealth generation, freedom from the Man… but how can you expect those from a business that never got properly thought-out?

Click to Tweet

When in doubt, refer back to your trading plan. Whether you are an experienced trader or just starting out, it should lay down the exact steps you should take on your way to your destination.

Click to Tweet

A trading plan helps one take a more structured approach to the market. In fact, since it is devised outside of market hours with a clear and rational mind, it is your best line of defense against market uncertainty. 

Click to Tweet

Understanding the ins and outs of your trading method forges your confidence. And confidence (in your method) makes it unlikely for short-sightedness and fear to heavily influence your trading decisions.

Click to Tweet

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