A trading plan is a definitive document that spells out everything you will do as a trader. It spells out what time frame charts you will use, what indicators and overlays you will use on those charts, how you will use those tools to determine your entries and exits. It determines how much money you are willing to risk per trade, and per day. More important it is a roadmap you can consult at any time prior to entering a trade, during the management of your trade, and after your trade.
Create Your Trading Plan Before You Trade Demo
Before you can begin to trade in a demo or live account, it is important that you spell out your trading plan. Please don’t start with bad habits and try to “wing it” – you will only frustrate yourself and eventually blow out your account. This is very important because by writing it out yourself, and then adjusting it, and fine tuning it, you are going to find that when you are on the screen, you will be much more tuned in to what the market is telling you to do.
Unless you write out your plan yourself, and re-write it, and adjust it over the course of your demo trading, you will not hardwire yourself properly.
The Learning Process
The learning process is essentially threefold:
- Read/see information/instructions
- See the information used in an example
- Execute ourselves using the info/instructions in a simulated environment
Once we get to step three, we are adding experience to our learning process. What will encourage us to continue to pursue this process are worthwhile experiences. These will come from doing what we are supposed to do when we are supposed to do it.
The chances of you remembering what you are supposed to do and when you are supposed to do it become much more likely if you have read it and then written it down yourself, as opposed to having just read it. We also need you to contribute to the process of creating your trading plan, and not just copying someone else’s.
You will understand your plan much more by constructing it yourself.
Why is it Important?
The importance of your trading plan cannot be overstated. While the human brain can, in the blink of an eye, take in far more information than we could ever use, it can only focus on just 5 or 6 things at once.
Because of this, you can start to see how important it is that you be taught the correct information. You should learn it thoroughly enough so that when the time comes, you will be able to absorb most of the initial steps of analyzing a particular market. It can be support and resistance, trend lines, chart and candle formations and technical indicators.
Doing this lets you focus on the most critical steps in the trading process. They are those handful of developments that determine your actual trade signals and the price behavior which determines your stop loss strategy and profit determinates.
Trading is Like a Pyramid
Analyzing and then trading can be viewed as a pyramid where 90% to 95% of the process is the foundation, then the base, then the building blocks of the pyramid; while trading is the tip where you are going to make a living from a handful of actual trading decisions.
That 90 to 95% core knowledge needs to have been spelled out by you in your trading plan. You will find that to remain patient yet focused will be much easier if you have a well-worn trading plan within easy reach.