This is the continuing story of our two imaginary traders, Peter and Paul.
Peter is a professional trader, Paul is not. Peter has a tested, proven, written trading plan that he follows each time he enters a trade, Paul does not.
Peter and Paul have had vastly different Stock trading experiences – Peter has just made another substantial profit – this time from the Bear market, Paul has lost heavily.
A chance meeting with Peter’s group of friends one day at lunch launches Paul on a learning curve that will see him become a good trader, but not without some hard lessons along the way.
Today Peter shares his trading plan and the importance of having a trading plan with Paul.
“Today we will work on your Trading Plan,” Peter told Paul as they sat down for the start of their next weekly mentoring meeting.
Peter handed Paul a copy of Robert Miner’s book, Dynamic Trading, and said, “Here, read this section of this wonderful trading book.” Paul read to himself quietly as Peter poured them both a cup of coffee.
“The purpose of Technical Analysis is not to be able to accurately identify every market position, all of the time. While this may be the daydream of many analysts and most amateur traders, it is an impossibility.
“Every method of technical analysis has it’s limitations and at times will provide contradictory information. Unless the analyst, trader or investor is willing to accept that his or her analysis will from time to time not provide a confident opinion of market position, he or she is doomed to failure.
“The objective of technical analysis is to identify those market conditions and the specific trading strategies that have a high probability of success.
“If there is a key concept associated with trading and investing, it must be probability. All consistently profitable traders and investors know that every trading and investing decision only has a probability of success, never a certainty.
“Losses are inevitable and are just as much a part of successful trading as profits. If a trader has a successful trading plan, he or she should have no more emotional response to a loss than to a win. Each will be inevitable.
“While it may be difficult to maintain a completely non-emotional relationship to trading and investing, an understanding that trading is a Business of probabilities will go a long way towards developing a stable attitude towards the Business.
“All successful traders have a defined, written trading plan. The trading plan can take many forms. At the very least, it will provide the minimum guidelines that must be satisfied before a trade will be considered. It may be as complex as a long set of very restrictive rules that must be satisfied before a trade can be considered.
“Each has it’s strengths and weaknesses. Neither method, whether rules or guidelines, guarantees success, but the lack of either will ensure failure.
“Why have a trading plan and not follow it? Each guideline and rule must be included with reason and purpose. All successful traders and investors consistently follow their trading plan and they know that if they violate their trading plan it will always be costly in the long run.
“A trader who does not consistently abide by his or her trading plan is doomed to failure.”
Paul looked at Peter after he finished reading, and understood the implications of what Robert Miner had written. He had never had any sort of trading plan. He had just taken the advice of other people and bought, held and hoped for the best.
Peter said, “You need a trading plan my friend if you are ever going to make money in this Business. Then you have to have the ability to follow it.
“The paragraphs you have just read are as important, and maybe more so, than learning any method of analysis or trading strategies or methods.
“Even a trading plan that included technical analysis and trading strategies that were 100% accurate, in other words, would indeed predict the future trend of a Stock or Index every time with perfect certainty, would not result in you making a profit if you do not know and act in accordance with the qualities discussed above.”
“With this in mind, I will now share with you my trading philosophy, trading plan and rules.
“I have found having this set of guidelines levitra orosolubile gives me a high probability of making successful, profitable trades. As Robert Miner said in his book, some losses are inevitable no matter what rules or strategies are used. They are a cost of doing business.
“A Trading Plan and rules that you have tested and trust will help you remove the two biggest enemies traders face – Fear and Greed. These two factors have probably cost more traders more money than anything the market can throw at us.
“By writing down and consistently following a solid plan that you have back tested and proven to be profitable with you paper trading, you put yourself ahead of 90% of market participants who fail to do any research or testing before they risk their capital in the market, and are eventually wiped out or give up because “the market just isn’t for me.”
“You must remember however,” Peter continued, “These are my guidelines. You might feel comfortable with them or you may not -you have to develop your own style.
“These rules also do not constitute trading advice…you must sit down and determine what your rules and guidelines are going to be. Use these…or not. You must however decide which of the parameters you are going to use for your trading, then –
Write them down into a plan of action – and follow the plan.
Peter’s Trading Philosophy –
He went on, “My trading objective is to enter trades in the direction of the major trend using daily end of day data. There are three conditions under which I will enter a trade –
When pattern, price and my mechanical filters indicate a trend reversal has taken place.
On the first correction within the new trend, for example, the first higher low in a new uptrend.
On any trend continuation signal once the Stock or Index has signaled the new trend is underway.
“The initial trend reversal position will always be in lots of 2 Futures positions or $20,000 invested in a Stock. A trend continuation trade entry will be 2 or more futures positions and $10,000 invested in a Stock.
Stop loss orders will be placed 5-50 cents or points past the extreme of the most recent swing pivot at the time the trade is placed – the number of points or cents used depends of the Stock or Future being traded.
“These numbers will be different for every trader depending on risk tolerance and account size. Only take on as much as you can handle psychologically, or you set yourself up for failure.
“If your position size is too large, you will tend to jump out at the first sign of trouble, often at the worst possible time. Trade within you comfort zone and success is much easier.