Planning your trade sounds like one of the most straightforward aspects to trading. Perhaps you sit down during the evening, scouring charts for the technical setups that you plan to enter the following day and go to sleep confident that the entry, stop and take-profit levels give you a high probability of success. This type of thorough planning is your key to success and the one thing which will provide you an edge when the market opens the following morning. This leaves the question of why so much of this planning goes out of the window as soon as you sit down in front of the live market the following day.
Failing to follow your trading plan is the single most influential element in losing money in any financial market. Similar to opening a bakery and deciding to sell shoes, losing focus on a trading plan creates confusion and, more dangerously, lets your emotions dictate the trade. Many traders prefer mechanical or even automatic trading systems for this very reason; the simple inability to follow their own trading plan and adhere strictly to the rules.
What creates this failure and surely this must be something that all traders can deal with?
This is a question asked by those who have no experience of sitting in front of a trading screen, watching price rise and fall with and against you whilst your profit and loss fluctuate dramatically every few seconds. The two emotions which are said to drive all financial markets, fear and greed, are two of the most difficult to temper when trading with real money on live markets and also the most influential. A solid trading plan aims to reduce a trader’s emotion, taking the trader back to the quiet preparation they made the day or hour before. A perfect trading plan will not allow the trader to change their entry, stops or take profit regardless of what the market ‘appears’ to be doing in the chaos of early morning trading.
Almost all new traders will have to go through the experience of losing money in order to realise the benefits of a solid trading plan. However, as we have already seen, the most robust trading plan in the world will not be effective unless it is put in to practice during live trading. The transition from theory to practice results in almost 90% of trader’s losing money. It is not that these 90% don’t have a trading plan; it is simply that the excitement and temptation of live markets prevents this being implemented properly.
Having the mental strength to implement your trading plan effectively is one of the most important milestones in trading. By developing a plan that will tell you precisely when to enter, exit and how much profit and loss each trade will incur, you will substantially increase the probability of being a successful trader. Practice and focus will determine whether this can be managed but once you have mastered your emotions and executed your trading plan becoming profitable becomes a whole lot easier.