4. The Work In Progress
No doubt the first measure to ensure you get the most from your Trading Plan is to write everything down. But still many people make the mistake of spending a lot of time creating a plan and failing to implement it.
Now that you see how a Trading Plan is an essential requirement to trading well, we have some more tips to help you carry out your plan.
The implementation of the plan is the last hurdle for many traders before becoming successful. For some it will take little time while for others it will take longer than expected or desired. In both cases you should enjoy it, because a Trading Plan is a work in progress.
A Contract With Yourself
The Trading Plan is essentially a contract with yourself to maintain the goals you would like to achieve by trading. If you develop a method, stick to it, without deviation. This does not mean a plan does not need adjustments. But the commitment to act always under the frame of the Trading Plan should be kept. Dow Dawson describes what a deviation from the plan is:
and then for some reason pop up a stochastic indicator and see that it is overbought. This may make you get out of your trade even though it is not a part of your exit strategy. I like the quote of 'if you get in on Paul’s advice, then get out on Paul’s advice.' This is saying nothing more than follow your plan and do not allow outside influences to interfere with your trading.
Written words have a strong power over our minds - try to sign a written contract with yourself where you specify that you will not only build a Trading Plan following the terms learned here at FXstreet.com, but also implement it. Wayne McDonell tell us how he did it:
Do I have the guts to push myself to the next level?
Am I willing to do whatever it takes to find success?
This may be silly. However, I assure you, it was an important step for me. I 'reenlisted' in Forex and made a 100 percent total commitment.
I realized that success in Forex was a lot more than make winning trades. I was striving for greatness. To be a great trader requires an unbelievable amount of work, energy, and effort. It requires patience and discipline well beyond what 95 percent of the market is willing or capable of doing. I realized that if I wanted to be in the top 5 percent of the market, I had to act like I was. I had to strive to be the perfect trader.
Commitments are not easy to keep when it comes to trading. For this reason, the contract with yourself should be read and honored each day until it becomes ingrained in your mind. This will strengthen your self-discipline and self-confidence. A mechanism to deprive or punish a broken contract could serve as an accountability partner as explained above.
There is something else that you need to be aware of: following a Trading Plan that you did not develop yourself may at best make you money but it will not necessarily satisfy your need for creative expression. Since, like many traders, you also have your Inventory based on your own ideas and beliefs, the most satisfying trades are those that are an expression of it. These kind of trades are an expression of your creativity, and when they produce monetary gains, the satisfaction feels twice as good. This need for creative expression is present in most of us and is a very powerful inner force that is hard to resist. Why do you think so many people say that trading is like an art?
The Inventory is thus the first outlet for your needs for self-expression and one of the reasons you should consider it an important component of the plan. Another device to satisfy this need for self-expression and the satisfaction you take from it is to install a separate trading account just for your experimental trades. Make sure to compile the ideas and observations from the “creative” account as well, so they can feed the entire Trading Plan.
This kind of distinction and tangible separation between different accounts may provide you with the kind of psychological conditions that will enable you to switch, through experience, from a mechanical trading mode to a more intuitive one.
If you nurture an Inventory with ideas about how the markets work then your trading strategies will have a foundation and your trading style will be shaped accordingly. Being built upon principles and ideas which relate to your personal universe will make you successful over the long term – you will know exactly why you are making money. But these principles and ideas have to be tested for validity. In this short video, Adam Rosen speaks about “writing a Trading Plan based on demo results”.
Did you know that the moment a trader has the maximum control over his or her activity is before entering a position? In the first place, the control to not make the trade is one of the greatest control features you can exercise. You can do something for your money while it is awaiting to be used in the market: you can protect it from bad decisions, you can keep it away from a recklessness attitude and preserve its potential for when the proper conditions are met.
Once the trader opens a position he or she is at the mercy of the market and the control is reduced. Now probabilities and skills come into play, which is true, but it is equally valid to say that anything can happen. So what trace of control is left? Well, the control to close the position, especially if it is a losing one, and the control to manage it into making profits.
Maximize and take advantage of the control you have and you will be ahead of many other market participants who never exercise control over their trading activity. Exercising the determination not to trade, not to chase the price, is one of these control mechanisms and leads to immediate improvements in your performance. In Don Dawson words:
Sitting on Your Hands
This is probably the most difficult part of trading. We have this well-thought-out strategy and now we must wait for the setup to materialize.
Whoever thought time could pass so slowly? Many of us are raised to think we must always be doing something or it is not work. So we end up making “boredom trades” because our market is not cooperating at the moment. One of the advantages to entering a trade is that we can set the conditions and the market must come to us in order to offer us a low risk/high reward setup. This is where discipline can help when patience runs short. You must remind yourself that you will only have your "edge" if you wait for your setup. Otherwise, you will just be gambling and not following your plan. Keep in mind that no one strategy will work all the time in the markets. There will be times when you will miss a market move because you had no setup, or the price did not come back far enough to get you in. Do not get upset. Keep this in
mind, "The markets were here before us and they will be here long after us." Simply stated, there will always be another opportunity to make a trade. I would much rather miss a market move because I had no signal than know that I chased a market because I let my emotions get in the way. This is a very low probability of success choice.
Think Different About Discipline
A Trading Plan is only good if the trader is disciplined enough to use it. And discipline comes from having confidence in the plan while confidence comes from having properly developed and tested your plan.
These statements are so widely mentioned they almost sound like cliches. But they are nevertheless such important cliches that their message cannot be ignored. Unfortunately, it is true that without discipline no Trading Plan can be developed in the first place. But the point we want to emphasize here is that you do not need that much discipline.
How can it be, is there any trick? Yes, there is a little trick we can play on our minds, and that consists first in questioning the very idea that we have of discipline. Most people think of it as something which has to be imposed on ourselves, something exterior, like a program or a diet, that we have to follow or implement in our daily lives. What if you start to think about discipline not as an external imposed force, but as something that emerges from inside you?
Remember when talking about creating habits: you only have to achieving little goals, make progress step by step, and soon the discipline inherent to that routine will become a habit, a natural condition, almost a need. If the Trading Plan is constructed in such a way that it fits your personality, no resistances and contradictions will block your way to excellency. That is why you only need to find a little bit of discipline and work with it, because afterward you will be doing something you enjoy.
The more precedents you accumulate, the stronger the habit becomes and the more confident you will stick with it even when things get tough.
Do Not Change So Easily
Even great trading systems have their strings of losses. One of the many traps traders fall into is to change that part of the plan we call the Decision Matrix after a few consecutive losing trades. When they try out a particular set-up and it enters a losing streak, they switch their attention to the search for another strategy or set-up with a higher Win Rate.
Another similar scenario which shows the inability to think in terms of probabilities happens when traders avoid trading the system until it is producing consecutive winning trades again. Then they jump on board only to see the system returning to a statistically lower rate. This dangerous approach can lead to a endless holy-grail chasing which often ends with further torment for the trader.
Therefore, any change in trading rules have to start with the Trade Journal in the form of a comment, to appear then in the Inventory if it is a major change in the way you think, and lastly go through the testing process. Only then are adjustments made in the Decision Matrix. Do not start making changes in your Decision Matrix while trading. Set a time apart to work on your plan and avoid making changes based on your emotional state.
Joe Ross describes the above situation when he writes:
You are in a trade, and your rules cause you to be stopped out with little or no profit. Shortly after you exit the trade according to plan, prices take off and move to where, had you stayed in, you would have made substantial profits. The move leaves you sitting there thinking you are stupid. You reason that there must be something wrong with the way you do things.
Your rules, your plan, or both must not be right. So you change what you are doing, or make a new rule so that the next time this happens, you won't be left behind.
Whenever we miss a big move and then try to find some pattern, indicator, rationale, or modification to make to what we are doing so that the next time we will not miss the big move, it is a part of the hunt for something magic - a continuation of our quest for the holy grail of trading.
You've got to believe in what you are doing and be able to trade from the knowledge that when you follow your rules and your plan, you will make money from your trading. When you become disgruntled and begin to change your plan, your rules, or both, you are setting yourself up for almost certain failure and the worst thing that can happen to a trader „o you will lose the courage of your convictions. Without it you cannot trade with any level of confidence.
This is why we encourage you to write out the reasons and rationale for every trade you make, even if you have to do it after you have completed the trade. You must develop a keen recognition of the trades that are your trades. Write out your trading plan every day and for every trade you intend to make. If you did not have time to plan every trade, be sure to review those you did make without pre-planning. Then you can go back over your trading and be able to see why and when you are successful.
Let Time Do Its Work
If you just got started in trading then it can take some time before you discover your trading niche. Professionals from many areas spends ten or more years in a grueling learning curve to be successful and earn an above-average income. Anyone who thinks that becoming a trader is not ruled by the same principles is in for a rude awakening. Slumps are inevitable and everyone goes through them, just ask your mentor or more experienced trading partners.
One of the final pieces of this puzzle is about how to handle the constant two-steps-forward-and-one-step-back of the daily grind. This piece brings a lot of things together covered up to now in the Learning Center.
New skills take some time to develop and they need to be nurtured. There is a time for everything- what matters is the awareness and intensity you bring into the business. You may, for instance, discover there are no such things as “missed opportunities”. If you develop the patience to let time do its work, soon you will find yourself not rushing for success, but rather letting it come to you. That knowledge is a powerful weapon.
Why is the implementation of a Trading Plan so difficult? Most people do not have the time nor the perseverance to commit to what is required to build a Trading Plan. After all, it is not a minor task to put a business together. If you realize there is lot more work than you originally thought or you do not have the time at the moment, FXStreet.com and its contributors can take part of that work from you by offering real time analysis and trading recommendations. These services can be a good starting point for you to find a methodology or just to get a feel of how other people analyze and trade the Forex market.
We would nevertheless suggest, to find the time to work on all these aspects and start as soon as possible building your Trading Plan. The duration of your learning curve is very much dependent of your speed of implementation. If you waist your time and energy in dispersed tasks like following charts all day long or browsing the Internet for the ultimate technical indicator, frustration and fatigue may easily put an end to your trading career.
Set Small Benchmarks
It feels better to accomplish many small goals than one big goal, therefore give more importance to small goals! While visualizing a bigger goal will serve for inspiration and guidance, setting smaller benchmarks along the way will provide you with satisfaction more often. This positive feedback loop will reinforce your belief system because the mere fact of achieving, no matter how small the goal is, will create and sustain a new image of yourself. The small accomplishments will feed a new image of yourself. This is like the compounding effect on your belief system, and it works!
Another function of setting smaller benchmarks is to create a path towards your larger goal and be able to assess, from time to time, if you are on the right track. It is somehow more realistic than just visualizing the desired future since you can evaluate if that picture is realistic or not. Along the way, you will discover that some actions take you closer to your dream than others, so that you can keep the whole Trading Plan alive. A way to engage in this process is following a Checklist like we have mention in the previous Chapter D03.
Frequent Losses And Occasional Huge Gains
No one is responsible for your losses but yourself– better you accept it or you are doomed from the start. Blaming “manipulators”, “insiders”, “big hands”, “brokers” or “high-frequency trading” is a form of denying reality. Technically, there are many ways to accommodate losses into your Trading Plan, as we have seen. Now it is your turn to recognize and accept the simple fact that losses are part of the profession. There are professional traders who prefer not to know they failure rate for the fear of becoming depressed- they follow instead other statistical figures such as ratios and win averages. They know they take a lot of losses, but they also know they make money in the end.
On the other hand, there are people who recognize the failure to accept occasional huge gains. We know that currency pairs tend to have impulsive movements from time to time. On a larger time scale these movements happen one or twice a year in the form of big trends of several thousand pips, but also on smaller time frames the same impulsive waves will emerge. If your trading methodology allows you to capture part of these movements, do not cut your gains too soon. Again, it depends on the nature of your method. If you are specialized in ranging markets, you do not really need to capture large occasional movements. But if your method's range of profit depends on this type of price action, as evidenced by the Maximum Favorable Excursion (see Chapter C02) or other statistical figures, then allow yourself to receive those occasional huge gains. Do not miss them because of lack of self-esteem and do not abandon your plan when the big trade finally comes along. You deserve those gains.
Leverage Of Intuition
Do not let the word “plan” make you think of the Trading Plan as something static and rigid. The majority of actions required for success are counter intuitive and if you are not aware of this, you may end up making poor decisions in your trading career.
There is one component of Trading Plan, the Journal, which precisely helps assess the value of intuition, because it organizes what your intuition is telling you. Make use of it and with time your plan will begin to show a different quality of results, and you will be able to make more and better trading decisions in a shorter period of time.
In the world of discretionary trading you will finally acquire the ability to use both analytical and intuitive skills. This is how top traders identify and act upon market action. It is when both right and left hemispheres of the brain work together to process and analyze information.
When you learn to think and act in this manner you will be, more often than not, ahead of the the crowd- you will see things that they never see. This is probably the holy grail investors spend millions each year on in the search of.
This little understood “leverage of intuition” is dormant in the trader within you and can be only waken if you plan your trading and trade your plan.
Now you have most everything covered to start your trading career or to continue the one you already have started. If you have a few more questions you would like to have answered or simply want to share your ideas, feel free to post at the LC Forum.
What you have learned from this chapter:
- Allow for periodic reviews of your Trading Plan to make improvements and adjustments
- There are many books and resources on trading psychology out there, but a simple Trading Journal might just be more powerful and useful to you than all of them put together.
- Following your Trading Plan requires that no aspect of trading should be left to chance.
- Each person's plan is unique and can not be duplicated. Therefore, your plan will work best when it is based on your individual needs
- The probabilities of success are very much conditioned by the existence of a plan.
- If you do not have a plan, you may confuse luck with knowledge.
- A Trading Plan is done step by step and it is an ongoing process.
- A Trading Plan will help you grow into a disciplined trader.
- A Trading Plan requires a lot of work, energy and time- to do this will take a 100 percent commitment from you.
- A Trading Journal provides you with a methodical way of maintaining a clear focus. It can also assist you in identifying your strengths and learning from your mistakes.