Do you sometimes come to realise that you've failed to follow your original oh-so-brilliant trading plan?
Unfortunately, there is always a gap between theory and practice. The good news is that even the smallest change can be of massive help.
The key aspect is to cautiously monitor how and when you tend to break the rules and set up a new pattern that will help you implement your trading plan efficiently.
The Faults in Trading Plans
Most traders realise the importance of setting up a trading plan, which should preferably be solidified on PC, tablet, mobile, or paper. The plan should be, at the very least, crystal clear in our minds.
The trading plan itself is not a shortcut or instant guarantee for profitable trading. In fact, it is relatively simple not to follow the rules of the plan, both by accident or on purpose.
Catchy terms like discipline and persistence are thrown into the air as potential solutions, doing little to help us traders in the heat of battle when a trading decision must be taken.
The main problem is that trading plans are mostly theoretical, they sound good on paper, but often cannot compete with the internal pressure to make quick, impulsive decisions in the face of price movement and market volatility.
In my view, practical step-by-step guidance is needed to bridge the gap between the trading plan in theory and your actions and decisions in practice.
During my years of actual trading experience, I identified two key concepts that help me the most in successfully implementing goals and plans in general and trading plans in particular.
Focusing on Pattern Breaks
Each trader responds to trading situations with in-built automatic responses. This is actually necessary to avoid over-thinking and over-analysing when trading.
Some of this unconscious behaviour, however, is most likely leading us in the wrong direction. Here is how you can start:
- The first step is to observe your own actions. A trader's task is to monitor their actions and record which patterns impact trading negatively.
- Next, try to fully understand which decisions lead you to breaking the trading plan.
- The final step is to break, or interrupt, the pattern and replace it with the desired action.
In the past, I had difficulties with keeping my trades open until the full target was hit (see the blue box in the image below). I would regularly cut my wins short (the purple box).
Adding a rule to my trading plan that I must reduce my market exits did not really work. The temptation to break the rules just one more time was too strong.
Rather than solving the problem on a theoretical level, I was paying special attention to my behavioural and thinking patterns in the heat of the moment. Basically, I focused on the specific moment when the trading plan would get broken.
The next time I found myself in the same situation, I needed to:
- make a conscious, well-planned effort to break my old behavioural pattern;
- create or train myself with the new desired pattern.
Over time and with more experience, the old pattern would fade away and the new pattern would become the default. This is a practical day-to-day tip, rather than a helicopter solution. As traders, we need both.
Source: chart from Admiral Markets MT4 SE - USD/JPY 60m chart 15-22 May 2017.
Creating Constructive Habits
Once we attempt to break the old and undesired pattern and train ourselves with the new and desired one, we create new constructive habits.
This transition is fragile. Good intentions are vulnerable to losing their momentum and old habits and patterns can re-surface quickly.
To solidify the new thinking pattern, it is important to establish habits that will help support the new approach.
When I had trouble holding onto my targets (see the purple box in the image above), I introduced a new habit as well. I added a trail stop loss to lock in profit (the thick orange line) and then closed my MetaTrader 4 platform for 15 minutes (or simply walked away from the screen). This forced me not to look at how close the price reached my target while knowing that I have some profit in the pocket.
The habit is basically what helps me follow the trading plan at the time I need more support.
Everyone has different problems and different solutions. For example, you are likely to check your mobile when trading. You can break this pattern by creating a habit of turning the mobile off as soon as you turn on your trading platform.
In any case, this article provides a roadmap of how you can work on actively changing your trading plan, rather than hoping for it to simply work out. You should also check out the video – Top 10 Most Important Aspects of a Trading Plan – below.
These steps may sound demanding, but ironically, a small conscious effort now will save you irritation later on. It works in pretty much the same way as the concept of leverage when trading: every single effort will have a much wider impact.
Cheers and safe trading,
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