Action Steps for a Perfect Trading Plan

Last week, we began with our first of two part series, ‘8 Step for a Perfect Trading Plan’, to help answer that question of what should be included in every trading plan and how it helps you become a more successful investor and trader.

Let’s now delve into the rest of the ingredients including Position Sizing and Risk Management, Trading Systems, Market Analysis and Weekly Review.


Position Sizing and Risk Management

While this is often talked about, few people really understand it.  This is because the majority of people make this their focus, the returns instead of the risk.  This is unwise.  You must look after the risks.  As a result of that, the returns will look after themselves.

Prior to entering the markets, you must have knowledge of your maximum level of risk for your portfolio in its entirety, as well as for each individual trade, as all the individuals together add up to the whole.  If it happens that all of the individual trades in a combination go wrong at the same time, this will cause a great deal of financial pain.

Position sizing is the concept described here.  It provides an answer to the question of what amount to invest into each individual opportunity, and when these are all added up together, how much risk is being undertaken by my portfolio at any point in time.  This is also referred to as “portfolio heat”.

Trading Systems

Until now, I have not even referred to entries and exists.  This is because they do not have relevance if you fail to get your risk management right.  Having in place risk management helps to alleviate the pressure of being required to carry out the perfect entry and exit on each individual trade.

The entry is the thing that most people focus on.  The entry is the best time and price at which to get in.  Unfortunately, most pay little attention to the exit, which is the question of when and where to exit.

This is a mistake that many people make, as they find it so difficult to sell when they are in a loss position.  Getting  over your hatred of taking a loss is an extremely vital priority.  If you do not accomplish this, it will be hard to be successful trader.

I focus on the exit first before I even consider entry. I always know when I will be exiting before I enter. 

When you lack solid exit plan and rules, entry should not even be on your agenda.

So make sure to record your strict entry and exit rules on paper, while the markets are still closed.  Absolutely never make changes to these when the markets are open.  Doing so will make you more likely to make, spontaneous, unwise, and emotion-based decisions.

Market Analysis

Market analysis is the element that separates the professionals in trading from the amateur traders.  Market analysis is partly art, partly science.  When people refer to intuition, it is most often because they have carried out trading for years and they have a solid feel with regard to the markets.  This is sometimes called the “10,000 hour rule”.

When you first start out, it is wise to stay with the strict science of market analysis, and the criteria it provides for gauging the position of the markets.

The majority of amateurs hold a myopic view with regard to the stock they are thinking about entering, without having knowledge of the market environment overall.  Please make sure that this is not you.

It is possible that it can be a combination of fundamental factors with technical factors.  Personally, I prefer fundamentals such as employment data, consumer confidence, market volatility, and other economic numbers such as inflation and interest rates.

All of these factors provide me with a feeling of market risk level, and inform me as to whether I should stay out, and, if I do decide to participate, the amount of money to invest in each opportunity, on the basis of current risk in the market.

Constant and Never Ending Review

The post mortem of the day is one of trading’s most significant aspects.  At this point, you have overcome entry and exit excitement, and it is time to not only calculate the profit or losses, but also to examine each completed trade and to do a review of how you entered with regard to the extent to which you stayed with your plan and rules of execution, as opposed to your loss or profit.

These factors make you a successful trader over time, and it certainly doesn’t take a substantial amount of time, just the discipline to want to do it regularly.

Even today, there are occasions when I neglect to carry out visualisation.  This is often because I am in a rush.  Sometimes I neglect to do my post trade analysis as thoroughly as I should, but I make sure that I am aware of this, and this awareness lets me do better on the next occasion.  Even to this day, my performance always has room for improvement.

Even though I’ve had over two decades in the markets, I am still learning.  It is probable that I will never cease learning.  This fact helps to maintain my excitement of investing and trading, and I am hopeful that it will have the same effect for you, too.

Find out how you can safely increase your returns, even in volatile markets, click here.



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