5 Important Ingredients required for an Effective Trading Plan: Part 2 – Know Thyself

know thyselfThis is Part 2 of a Special 5 Part series on how to write an effective trading plan. Before you start, please go through the Glossary at the bottom of the page. For related articles, please see:

Ingredient #1: Know Thyself

“It is said that if you know your enemies and know yourself, you will not be imperilled in a hundred battles; 

If you do not know your enemies but do know yourself, you will win one and lose one; 

If you do not know your enemies nor yourself, you will be imperilled in every single battle.”

– Art of War

One of the conclusions that Jack Schwager made in his book “The New Market Wizards” was that the best trading system was one that worked for you, your personality and you beliefs.

Well, some may ask, what does knowing yourself has to do with a Trading Plan? The answer is Everything.

If you are starting a business, how would you prepare an action plan without an estimation of the resources you have? You can’t sell a service without knowing what skills you could provide. If you don’t understand your weaknesses, you don’t know what your risks may be. In short, knowing yourself is to know your “resources” which are essentially includes your strength, weakness, personality, skills set and etc.

Many struggling traders claim to know the markets at their finger tips. They claim that they have been trading the financial markets for N number of years and they are an expert at certain or all the charting signals. Nonetheless, these Traders forget that their business model is based on only one customer, one operations manager, one finance manager and etc. And all the above is the same one person.

With that, Ingredient 1 of writing a good trading plan is to take time to understand You. Which reconfirms my answer, knowing Yourself is an important ingredient in your Trading Plan.

Beliefs

Trading is like driving, you need to belief that it works and you need to be prepared for it. Very rare do you find someone driving at 120 mph without ever believing that a car is capable of doing that. In fact, they believe that driving was possible before they made the decision to drive. They then make the effort to get educated. From there, they made mistakes and they learnt from it.

Likewise, you need to go through the same mental exercise in Trading. You need to believe that trading works, why it works and how it works. On top of that, you need to understand that the Belief System will only manifest itself if you make the necessary sacrifices to get it going.

If you’re Belief System is shaky, you will very easily give up or be influenced by other traders. Think about it, I rarely hear a person give up if he/she fails a driving test. In actual fact, everyone believes that it’s nearly impossible not to pass a driving test. And that is how a Belief System should be.

Be Honest

Your Strength will be your greatest Asset, so don’t oversell it or it will cause self destruction. On the other hand, your Weakness will be your greatest Liability, only through genuine acceptance of your weakness that you’re able to protect yourself from potential threats derived from it.

The most effective way to unveil yourself is by being honest. This includes accepting your strength and weakness.

 

That’s all for Part 2 of this series. Please subscribe to my newsletters for the next few parts of this series.

Glossary

  • Trading Plan – a detail plan of one’s trading career. This is essentially a business plan which includes a trading objectives, financial/non-financial goals, implementation and etc.
  • System Rules – A simply a group of specific rules, or parameters, that determine entry and exit points for a given equity. Sometimes also known as Trading Strategy.
  • System Components – different parts of a System which contributes to the main system. For example, Exit Rules/Strategy is a system component.

 

 

Thank you and happy trading!

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