Anyone who stops learning is old, whether at twenty or eighty. Anyone who keeps learning stays young. The greatest thing in life is to keep your mind young.Henry FordHenry checked out at the ripe age of 83 so I guess he was an expert on the subject but that hasn't changed my opinion that growing old sucks! Body aches are more frequent, healing takes forever, your facial cartilage continues to grow making you look more elephant than human and throwing your hip out during fervid intercourse is a distinct possibility. Many believe that with age comes wisdom. I believe with age comes experiences and wisdom comes from learning from those experiences and acting accordingly in similar situations. When it comes to the trading world I have known traders and investors that gloat about the number for years that they have been in the 'game'. They all had great insight into the inner workings of the market and most of them had called 10 of the last 3 major market tops. They could talk the talk and carry a decent conversation about the markets but seem incapable of walking the walk. Is the human race so self-defeating that we can commit the most heinous of trading mistakes over and over again and not learn from them? Why aren't we getting any wiser? This isn't a rhetorical question I honestly don't know. I can only conclude that the emotions of fear and greed are too overwhelming for even the most experienced of traders to tame.
I believe there are 2 parts to a trading plan: 1) Market analysis and the execution of your analysis using proper risk and money management.
Market AnalysisHave a way of analyzing the markets in a consistent way. By consistent I mean don't flip flop between indicators or methodologies. The new SuperDuperBigMoney indicator that Marky Markets is selling for only $199.99 isn't going to become a money making machine unless it fits into your existing analysis. Understand that markets are a function of supply and demand. Build on this premise and study the concepts (like price and volume :)) over and over again. You will come to many self-realizations that will allow you to put meaning behind the words of supply and demand and the relationship with price. Believe in the concepts that you are studying to the point that you can explain them to others easily with clarity and confidence. Study the markets with a psychological lens. Understand when the big boys are unusually active or disinterested and what is their intent. Understand the tactics used to lead the retailer traders to slaughter and join the attack. Look at your trading account as if it was the account of someone else. If you are up congrats keep up the good work if you are down then swallow that pride without choking and admit there is an issue with your trading and fix it. You are only fooling yourself in the end. Validate your analysis by backtesting your rules but be honest and don't curve fit the analysis. Again, you are only fooling yourself in the end. Be consistent each and every time to the point that your trading seems mundane but profitable. This will help keep your emotions in check.
Risk and Money Management
So you studied the markets for months, back tested your trading analysis and found a decent number of trade opportunities that you would execute and profit. So what is the next step? Of course plowing 100% of your capital into the next set up and retire. Duh! To be serious for a moment (only a moment) being able to analyze the markets is part of the trading plan the other part, which I believe is the most important part, is the execution. When do you get in? When do you get out? When do you know when to hold'em, know when to fold'em? Again this is the pitfall for many. If emotion is the arch enemy of traders then maybe laying out some hard and fast rules and not deviating from them may help with the emotional aspect of trading. I do relatively well with my directional options trading when my trading plan is executed with very strict rules. I realized that if I was consistent with trade execution and didn't deviate regardless of what I was feeling that the merits (profit) of my trading system would reveal itself. If I was constantly changing the rules then how would I know that my trading plan was profitable. When I identified a trade setup I allocate the same amount of capital and set the same stop loss amount which is 2.5% of my account. Changing the allocated amount would mean that one trade set up is 'better' than another. To me that negates the principle of consistence. It also means that somehow I have discover some additional insight into the outcome of the trade. The percentage I allocate is an amount I am comfortable with keeping the emotion of fear at bay. I view each trade as a potential loser and ask if I'm okay with this loss. I also started to look at risk and reward in terms of percentage changes vs absolute amounts, again to tame the emotions of fear and greed. Which sounds more exciting making $2500 or 2.5%? Use the one that doesn't get you excited. Lastly, I always enter a stop loss and limit sell order immediately after my trade is executed. The reason is that I cannot rely on myself to enter the order should my pre-defined profit target be reached. I'm just too greedy! This is not to say that I won't adjust or move my stop loss up (only up) to breakeven but the idea is to automate as much of your trading as possible to remove the emotion that leads to bad decision making.
Thanks for reading