What trips up the vast majorities of traders so they never quite make the transition from new trader to good trader?
- Not being able to deal with the stress of trading: this is caused primarily from a lack of faith in themselves and or their method.
- They lack the ability to pull the trigger when it is time to enter a trade or cut a loss.
- Some people just can’t overcome the fear of losing money both in the entry and exit.
- Many traders just do not have the discipline or work ethic to create a trading plan through proper homework.
Most traders have no trouble over analyzing the markets to death with enough indicators to make someone go cross-eyed. Many traders read enough books to know how to trade, many follow enough different people online that they get so confused they do not know what to do. Most traders spend far to much time in front of the computer all day watching the prices tick. The majority of traders would really quit trading if they added up the amount of time they spent for the privilege of losing money.
What is the key to over coming the barriers to success in trading. A GOOD TRADING PLAN, not a few rules I mean a complete plan. A plan that you 100% believe in based on your own studies and back testing. Your own personal plan that YOU created, not someone’s opinions.
What needs to be in there?
The Trading Plan comes first and should account for the following parameters:
1. Entering a trade. Quantified approved entries.
2. Exiting a trade. Predetermined Exit point BEFORE you enter a trade.
3. Stop Placement. How will you know you were wrong about a trade? A stop loss, trailing stop, chart signal, volatility stop, time stop, or target price.
4. Money Management. How much capital will you risk on any one trade? This is the key to position sizing.
5. Position Sizing. How much capital will you put on any one trade? Do you have rules that tell you to trade bigger or smaller based on the odds?
6. What to Trade. What qualifies stocks to be on your watch list?
7. Trading Time Frames. Are you going to day trade or position trade and hold for a week or more? or will you be a short term or long term trend follower?
8. Back Testing. You need back testing either with a computer, by reviewing charts, or others research to show that your system is a winner.
9. Performance Review. You must keep a detailed log of your trades and watch your performance to understand the wins and losses and their causes.
10. Risk vs. Reward. Each trade must begin with the potential of winning more money than you are risking.
This is a very basic outline, I suggest expanding this to include 30 rules minimum; 10 each covering the areas of risk management, psychology, and method. If you can write this, believe it, and follow it, you will win in trading the only question that remains is when?