A Trading Plan Is Needed For Success

Anyone serious about achieving consistent profits in the marketplace must have a trading plan. All top traders have a written trading plan and it must be followed. This is the same as any business having a business plan. To be successful in trading you must treat it as a business. A sound trading plan is your edge.

One of the keys to developing a successful trading plan is to have it compatible with your own personality. You must be comfortable with your plan. Does your personality fit better as a day trader, a long term trader, or something in between? What kind of risk tolerance do you have?

Your trading plan must be followed one hundred percent. This will help keep emotion out of your trading. The biggest enemy in trading is emotion. You want to be objective in your analysis and decision making. Following a trading plan is crucial in this respect.

Just what are the components of a complete trading plan? The most important element of a trading plan is money management or risk control. This means cutting your losses short. I can't stress how important this is. Not only will this help protect your financial capital, but your psychological capital as well. You need both to be successful.

Here is a list of key trading plan components:

1. Money management. Risk control. Cutting your losses short. Many times using stop will help in this regard. The only thing a trader can control is the amount of risk in a trade. Lose the least amount possible when the market goes against you. This is the secret to success.
2. Reason for a trade. This can be technical, fundamental or a combination of both. It can also include secondary confirmation tools such as seasonal tendencies, historical levels along with overbought and oversold indicators.
3. What to buy or sell? Which market or markets?
4. Position sizing. How much to buy or sell? This could be considered part of your money management. Most top traders will not risk more than 5% or so of their total capital on any given trade.
5. Specific entry. When to buy or sell?
6. Specific exits. When to get out of a winning trade and when to get out of a losing trade?
7. Discipline to follow all the components.

If you don't follow a trading plan, you are asking for disaster every time you enter a market. A trading plan can evolve and change over time as you gain more knowledge and experience. Your trading plan will improve the more you understand what works and what doesn't work in the marketplace. You should only make changes to your trading plan when taking time away from trading and using this time to review your trades and learn from them.

A trading plan ties all aspects of trading together and gives you the edge needed to be successful. Understanding the psychology of trading is what turns a fairly good trader into a great one. Remember to study the wisdom of the market masters, past and present. It's a goldmine just waiting to be tapped.

About the Author:
Chief Investment Strategist for Tradingmarkets4u. Over 20 years experience trading the stock market, futures market and options.