“We are what we repeatedly do. Excellence then is not an act, but a habit.” ARISTOTLE.
A Trader is always trapped in a vicious cycle of greed and fear where the majority of wrong decisions are taken. In trading the reaction time is limited, so it is important that a Trader needs to coach himself to do the right things at the right time. That is where a Trading Plan is important.
There is a saying that if you fail to plan, then you plan to fail.
So what is a Trading Plan?
A Trading Plan is a roadmap where there are rules and principles which compass three main areas of trading namely -
• Decision making tools for generating buy and sell signals along with profit booking and stop loss exits.
• Money management principles of Risk: Reward Ratio along with Total profitable trade as a percentage of total trades taken.
• The discipline of following your trading strategy.
The Decision-making tools as per Dynamic Levels include
• Right entry
• Right exit
The Trader should use these Strategies which have the record of generating enough profits in average of ten trades, after deduction of losses in those trades as well as expenses like brokerage and STT. The trading plan should cover the base of entry decision-making tools whether the entry is based on fundamentals or technical analysis.
The Right exit should incorporate positive Risk: Reward ratio which is nothing but seeing a profit per trade which should be a multiple of amount per trade of risk taken. As per Dynamic Levels the minimum recommendation of Risk: Reward ratio should be 2:1 which means in every trade if you are risking Rs.1000 the minimum profit per trade should be Rs. 2000.
For the Right Entry and Right Exit levels for any stock, one can use the Dynamic Levels Ladder.
Money Management principles: The principles of seeing bigger profits and booking small loss helps us to keep the human emotions of greed and fear in check. The human brain is wired to book small profits and look at large losses. But as the Principles of Risk: Reward is attached to any strategy, the human emotions of greed and fear are controlled, and the acceptance that small loss in many trades can occur but the overall profits in total of 10 trades will give him the confidence to carry out his strategy in a disciplined manner.
A Trading Plan should be a process where a Trader should note down his experiences and consider it as a feedback to improve his decision-making in the future. The performance–feedback-experience loop should be an integral part of a traders learning process which will accelerate his growth to be an independent trader while keeping his emotions in check.
The trading plan should include a journal where all the trades’ details should be noted and reviewed once every week with proper feedbacks and suggestions which should be implemented into the trading systems.
A trader should think in terms of points and not in terms of money
Whenever a trader thinks in terms of money he is getting in a position or thinking of getting out. His trading psychology gets affected as money has the tendency to influence Entry and Exit which can be a disaster as one trade which is not executed as per the trading plan can eat his total profits.
The journey of a profitable Trader is a challenging one but the trading plan is the tool which will help the Trader achieve his goal to make money in a systematic manner with a proper framework and incorporating market knowledge through self mastery.