Conviction in Your Trading Plan

Dec 30, 2007: 6:37 PM CST

I cannot underscore the importance of a personally created trading plan to help guide you to success. Plans address a series of contingencies and document your anticipated response when any of these events occur that require your decision, whether to enter, exit, hold, place a stop, or diversify.

Without such a plan, or a basic philosophy of why prices move and how to perceive and act on market opportunities, traders will be completely at the mercy of every move in the market, and will be susceptible to tips, rumors, and all sorts of information that will lead to sub-optimal trading results.

A plan is meant to guide your actions and direct your decision making when under the fire of constant price movement in the market. Your plan should tell you when to buy, how much to buy, how long to hold, and when to sell.

Those are the four core points of any trading plan. It is often best to have a more detailed, descriptive plan that encompasses the broader picture in greater depth, but also a separate plan that fits on one typed page that details the absolute basics of how you arrive at certain conclusions and how you make decisions.

While a larger document may assess as many possibilities or contingencies as you can perceive, a smaller “tactical” or action plan will be recalled to your mind far more easily than a 30 page document.

When I first wrote my trading plan, it evolved into a massive behemoth upwards of 40 pages that attempted to detail what I would do in every situation and how I would react, and included detailed definitions of each concept I addressed.

It literally “looked great on paper,” and was impressive to show to people, but in reality it did me little good.

It was not until a trader advised me to simplify the plan to one page that the necessity for a concise, clear action plan became clear to me. Now, I keep that simplified document next to my trading monitors for quick and easy reference.

It contains a simple description of why prices move and what I expect to accomplish, clear trade set-ups (perceived opportunities), clear rules for position sizing (and potential leverage considerations), and how to place stops, targets, and exits.

It almost flows like a “checklist” that I read through and view daily.

The purpose is to ground my actions in concrete concepts so that I can make actionable decisions throughout the day when I would otherwise be chasing market moves or paralyzed with indecision due to the large amount of information and “beautiful charts” available to me.

Over time, I’ve learned to simplify charts, simplify decisions, and maximize my limited resources.

I strongly encourage you to do the same.

1 Comment

One Response to “Conviction in Your Trading Plan”

  1. jeff Says:

    Good advice. I’ve done basically the same thing for the last 30 years or so.