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The Importance of a Trading Plan
from: Yves MailhotTrying to win in the stock market without a trading plan is like
trying to build a house without blueprints - costly mistakes are
inevitable.
Why do you need a Trading Plan?
1 - During trading hours, emotions will turn smart people into
idiots. Therefore, you have to avoid having to make decisions
during those hours. For every action you take during trading
hours, the reason should not be greed or fear. The reason should
be because it is in the plan. With a good plan, your task
becomes one of patience and discipline.
2 - Consistent results require consistent actions - consistent
actions can only be achieved through a detailed plan.
What should be in your trading plan?
1 - Your strategy to enter and exit trades
You have to describe the conditions that have to be met before
you enter a trade. You also have to describe the conditions
under which you will close a position. These conditions may
include technical analysis, fundamental analysis, or a
combination of both. They may also include market conditions,
public sentiment, etc...
2 - Your Money management rules to keep losses small - the goal
of money management is to ensure your survival by avoiding risks
that could take you out of business. Your money management rules
should include the following:
- Maximum amount at risk for each trade. - Maximum amount at
risk for all your opened positions. - Maximum daily and weekly
amount lost before you stop trading 3 - Your daily routine -
after the market closes, before it opens, etc...
4 - Activities you carry out during the weekend.
5 - I also like to include reminders that I read every day
I will follow a trading plan to guide my trading - therefore my
job will be one of patience and discipline.
- I will always keep my trading plan simple. - I will take
actions according to my trading plan, not because of greed,
fear, or hope. - I will not deceive myself when I deviate from
my trading plan. Instead I will admit the error and correct it.
I will have a winning attitude.
- Take responsibility for all your actions - don't blame the
market or world events. - Trade to trade well and for the love
of trading, not to trade often and not for the money. - Don't be
influenced by the opinions of others. - Never think that taking
money from the market is easy. - Don't try to guess the future -
trading is a game of probabilities. - Use your head and stay
calm - don't get excited or depressed. - Handle trading as a
serious intellectual pursuit. - Don't count how much money you
have made or lost while you are in a trade - focus on trading
well.
A trading plan will not guarantee you success in the stock
market but not having one will pretty much guarantee failure.
For an example of a trading plan, visit
http://www.TradingFramework.com/tradingplan.htm
About the author:
Yves Mailhot http://www.tradingframework.com
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