3 Questions To Find Your Trading PlanBy Cory Mitchell
You have put in the work creating a trading plan or possibly spent money on supposedly great strategies, but you still cannot seem to turn a trading profit. Or maybe you are starting out in trading and investing and want to be cautious before you start putting real money on the line. No matter what level you are at, before you trade - or if are already trading and struggling - you should have a trading plan. That plan needs to be tailored to you and your needs; a plan that is not will likely result in a drain on your trading account.
The following three questions can save you a lot of grief. Run through these questions during your planning stages to make sure your plan will serve you well. If it cannot pass this three question test, it should not be used.
Why Ask These Questions?Executing a plan is not just about the design itself, it is about the person executing that plan. Someone can search their whole life for a great trading system, not realizing it is themselves that need work, not the system. Therefore, these questions take the plan and the trader into account, making sure the two fit together. No matter how good a trading plan, it is useless if the trader cannot personally stick to it or implement it properly.
These three questions will help to clarify the trader's objectives for the trading plan, take inventory of the consequences which may arise by executing the plan, and determine if they will be able to even stick with their plan, given their personality.
1. "Does the Plan Allow Me to Achieve the Outcome I Want?"
Sounds simple enough, but not so fast.
An outcome needs to be specific and measurable. Stipulating "I want to be rich" is not concise enough. What is the ultimate goal that you want your trading plan to bring you? Is the outcome feasible and reasonable? Can the plan you currently have actually produce that, or given the realities of the plan is it likely to fall short of the outcome you desire?
The plan and outcome must also balance short-term and long-term goals. While the long-term goal may be to be financially independent, continually trying to make as much money as possible in the short-term with high risk trades could jeopardize the long-term goal. Short-term goals must work in harmony with the long-term goals, not against them. Brainstorm what you want your trading plan to produce and make sure that the plan works to satisfy both the short and long-term desired outcomes.
2. "What Are the Consequences and Risks of My Plan, and Can I Deal with Them?"
In this step we strip away the fantasy and focus on reality. The fact is most traders lose money - even very smart ones - so how is your plan different? All plans have risk; what is the downside of the strategies you have employed? Go through the plan and write down all of the risks and pitfalls you see.
Now, also consider consequences outside of trading. Will realizing your plan mean you spend less time with family or friends? Will it mean cutting back on certain expenses? Will it create more stress (less stress) or cut into other work time?
Once all the potential risk and pitfalls of your strategy have been fully and honestly addressed, can you realistically handle all the potential consequences of trading this plan? If so, proceed. If not, rework the plan making sure the consequences of your plan are within your personal tolerance.
3. "Does the Plan Account for Me Being Me?"
This is the most important question, as ultimately you must be able to implement the plan. A plan means nothing if you cannot execute it.
If you cannot sit in front of a screen for more than 30 minutes, no matter how good your plan is you will likely not be a good day trader. Or, if you cannot sleep at night with an open position, your swing trading plan will likely do you no good. You will continually struggle to adhere to it.
We each have different traits and tendencies. If you have a gambling streak, account for this in your plan - maybe have a demo account off to the side (or have a play money poker game open) so you can satisfy your gambling craving without losing real money. Plan and account for everything.
Be brutally honest, and make sure your trading plan accounts for the market and yourself. Accept yourself for your tendencies, and make sure that the plan can actually be employed by you based on who you are. Do not sugar coat anything, as doing so could result in problems down the road.
If the plan is easy to implement for you and fits with who you are, use the plan. If you do not think you will be able to stick to it, come up with a plan you can follow.
The Bottom Line
A trading plan is only as good as the trader who implements it. The plan and trader must mesh, or the trader will be unable to implement the plan and it will be useless. To make sure the trading plan fits, the trader must pass the plan through three questions: Does the plan achieve the outcome I want? Can I handle the consequences of the plan? Does the plan account for me being me? If the plan can pass through all of these questions, the trader has a much better chance of being able to actually follow through with their investment strategy and is more likely to experience success in the markets.
Read more: 3 Questions To Find Your Trading Plan | Investopedia
Follow us: Investopedia on Facebook