Woody Allen once said a stockbroker is someone who invests your money until it is all gone. We are conditioned to think an investment is safe and sensible but it is often not the case. The wise man is an investor who shuns wild speculation and abhors foolish gambling.
What about a trader? To some extent, he also shuns gambling but he is a speculator. All successful traders have one common, yet very important ingredient in their trading methodologies: a game plan.
During World War II–the invasion of Britain was planned but never executed, while the Battle of Britain was executed, but never planned. In the same way, many traders and investors go through their short investing lives planning trades they never execute and executing trades they never plan.
Success often follows the wise trader/investor who identifies an effective strategy and has the discipline necessary to carry it out.
The basic elements of a trading plan should provide the reason for logically entering and exiting a position, whether it proves profitable or not. Once a position is entered, the price can only take three paths: rise, fall or remain unchanged .
Trading plans may be mental or written, but written plans are best.
· Reasons for entry into the position
· Note the actual price of entry into the market, and how it compares with your planned entry price.
· Note the stop-loss price level and the liquidation plan once the market is entered. Also the minimum profit objective and does it correspond with the risk involved in the trade.
· The trader should check his record of closed profits and losses, to ensure that results generally parallel the plan’s expectations regarding profit or loss.
My mentor Ray Barros has a Risk Management Excel sheet for his students to plan before executing a trade.
All successful traders do their planning before executing their trades in some ways, and the results of the plan should be parallel with the objective and risks parameters. The trader should have a plan form that is complete for every trade, and a strong discipline so that there is no significant variation within his control between the actual and possible events.
Therein lies the path to making a successful trade with a strategy and discipline to execute the strategy, with the probability of winning the trade on his side.