Building a Winning Trading Plan

There is an old saying in business: "If you fail to plan, you plan to fail. Ask any trader who makes money on a consistent basis and they will tell you, "You have two choices: you can either follow a plan, or you can fail." That's it in a nutshell. Have a plan or fail. If you have a written trading plan already, congratulations! While it's still no guarantee for success, a plan is better than none at all. If your plan is flawed, at least you have something that can be adjusted. Your success won't come immediately, but at least you are in a position to chart and modify your trading activity. By documenting the process, you learn what works and how to avoid repeating costly mistakes. If you have a plan, super, keep modifying it. If you do not, I have listed some idea's that can help you get started.

Assess Your Skills

Ask yourself, "Am I ready to trade?" "Have I tested my system on paper, before using my real money?" "Do I have confidence that my system is going to work?" Can I follow my signals without hesitation?" If you can answer these questions with an honest "yes", then you are ready to take that first step and begin trading for a living. The stock market is set up to separate you from your money and transfer wealth to the professional trader. Trading is a battle of give and take. The real pros are prepared and they take their profits from the rest of the crowd who seem content to hand their cash over. These novice traders, lacking a plan, give their money away through costly mistakes. This may sound brutal but I got to tell it like it is. It's your job to take the crowds money from them and make them pay dearly for their mistakes. The market does not tolerate people who lack respect for it. The crowd lacks respect for the market and for this, they will pay. Always respect the market and never become complacent. Always look for the edge, look for the advantage. Your cash is on the line, you can't let them take it from you.

Mental Preparation

How do you feel? Do you feel up to the challenge ahead? If you are not emotionally and psychologically ready to do battle in the market, it is better to take the day off; otherwise, you risk unnecessary losses. Trading is financial war. It's you against everyone else. When you enter your trading room, there are millions of people trying to take your cash by getting the better of you in a trade. For every trade you make, there is somebody on the other side of the trade who thinks you're wrong and they're right. Only one of you can be right and they have no mercy. I remember what my martial arts instructor told me years ago while I was training for a big tournament. He said " For every hour you are not training, your opponent is in the gym training with one purpose in mind and that is to beat you" Trading is the same way, it's a constant learning process and when you are not doing all you can do to better your trading, your opponent is. Without mental preparation, you will lose. If you are angry, hung-over, preoccupied or otherwise distracted from the task at hand, you can't consistently make money. Many traders have a routine before each market day that prepares them for the day ahead. You must do this also. Create one that puts you in the trading zone.

Set Some Goals

Before you enter a trade, make sure the risk/reward ratio makes sense. Many traders will not take a trade unless the potential profit is at least three times greater than the risk. For example, if your stop loss is $1.00 below your entry point, then your goal should be at least $3.00 to the upside. If resistance is $3.00 above your entry, then the trade makes good sense. If resistance is just $1.00 above your entry, then this trade has a very high risk verses reward and should not be taken in my opinion.

Preparing for the Trade

Whatever trading system or program you use, identify major and minor support and resistance levels, set alerts for entry and exit signals and make sure you can easily see and detect all signals your system generates. Your trading area should be free from distractions. No small children running around and needing attention. No trying to listen or watch that movie you rented last night and didn't finish. No trying to catch an afternoon baseball game on TV while trying to trade. I love baseball, but I do not watch any games during market hours if one should be on. I reserve that for the evenings only. Remember, you are trading for a living and distractions can be costly.

Exit Rules

Most traders make the mistake of concentrating only on their buy signals and entry points and pay little attention to when and where to exit the trade. Many beginners won't sell if they are down because they don't want to take a loss. They say "It's not a loss until I sell" . I got news for these people. At the end of the day, if their account value has dropped significantly, they have lost money, whether or not they sold the stock. If your stop gets filled, get over it or you will not make it as a trader. If your stop gets hit, it means you were wrong, don't take it personally, its part of the business. I lose more trades then I win when I day trade because of my tight stop loss rules but I'm still able to trade for a living and make plenty of profit by managing money properly and limiting losses. I don't care if I'm wrong 4 out of 5 times. I never risk more than a set percentage of my portfolio on any trade and all trades are equally distributed. If I lose 1% on the 4 trades and make 10 or 15% on the one winner, I'm going to have a substantial overall gain at the end of the year.

Record Keeping

After each trading day, adding up the profit or loss is secondary to knowing the why and how you did it. Write down your conclusions in your trading journal so that you can reference them again later. All good traders keep good records. If they win a trade, they want to know exactly why and how. More importantly, they want to know the same when they lose, so they don't repeat the same mistakes again. Record comments about why you made the trade and lessons learned. Also, you should save your trading records so that you can go back and analyze the profit/loss for a particular system. Record the average time per trade, this is necessary to calculate the efficiency of your system. The longer the stock takes to move after you are in the trade diminishes the efficiency of the trade. It may be a winner, but if it takes too long to get there, funds are tied up and opportunities are missed elsewhere.

Final Thoughts

There is no way to guarantee that a trade will make money. Your chances are based on mathematical probabilities and your skill and system used. There is no such thing as winning without losing. Professional traders lose many trades, it is the excellent management of there capital that keeps them in the game. By letting your profits ride and cutting losses short, you may lose some battles, but you will win the overall war. Most traders and investors do the opposite; they cut their winners short by taking the small gains while refusing to part with the losers which is why they never make money. The goal of any trader should be to gain enough skill to use their system so that they are able to make trades without second guessing or doubting their decisions.