5 Important Ingredients required for an Effective Trading Plan: Part 5 – Final

This is Part 5 of a Special 5 Part series on how to write an effective trading plan. If you haven’t done so, please go through the Glossary at the bottom of the page. For related articles, please see:

Ingredient #4: System Benchmark

Have you ever written a set of trading rules and then failed to execute them later? And that’s just because the Trader-Next-Door made 3 times more profit than you on the same trade? Do you jump around from one exit strategy to another and then realise that you should have just kept to your original rules?

I believe this is quite typical for Amateur traders who do not understand their own system. More importantly, they do not appreciate when the system would work and when it doesn’t.

Benefits of Benchmarking

The idea of bench marking our trading system is to help us, in a systematic manner, to focus on trading systems that are superior to others. The entire exercise would require you to narrow down your options and allows you to hand pick on what you belief is the best system.

 

As Bill Gates says it:

“”My success, part of it certainly, is that I have focused in on a few things.” 

As a reminder, when you bench mark, you are making comparisons of all the systems that you know. You do not and Should Not include any systems that you’re not familiar with. The key is to focus on what you know and not on learning any more. You can, however, make an effort to understand your existing systems better. This would definitely compliment the benchmarking exercise and help make informed decisions.

The more exhaustive your due diligence (again, only on your existing systems), the less likely you will hop around between systems in the future. Remember, the objective here is two fold, (1) to pick the Holy Grail within your portfolio of systems and (2) to prevent you from deviating from your final Trading Plan.

 

Ingredient #5: Make Room for Improvement

“Although personally I am quite content with existing explosives, I feel we must not stand in the path of improvement.” -Winston Churchill

If your trading is good, then Make it Better, there will always be room for improvement. Don’t be contented with Good just because your trading is showing decent results. Make a conscious effort to prevent yourself from pitfalls in both aspects of psychological and technical trading.

Do not rest until you’re mentally, emotionally and technically consistent.

On the other hand, I’m not proposing that you should make any leap changes in your trading system. You should only be making small Incremental changes once you’re Consistent. Note the emphasis here is Incremental and Consistent as last thing you need is a revamp of what is already a profitable system.

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If you’re struggling, here are a few suggestions you can work on:

  • Work towards a more balanced (system) portfolio
  • Work to achieve a more Efficient and Effective Trading Routine
  • Work towards greater Mental Strength

Lastly, make sure to review your trading plan at least once or twice a year. During those review period, use it as an opportunity to make room for improvement.

 

Conclusion

Writing an effective trading plan is not an easy task. However, it is also not an impossible task. Amateur traders often only focus on system rules and completely ignore the bigger picture.

The key to a good Trading Plan is to have the right “Ingredients”.

The “Ingredients” that I’ve included in this Special Series is merely a suggestive list and not an absolute. These ingredients has worked very well for me and I’m sharing it from my personal experience.

These Ingredients should be added into your existing plans. If you don’t have a Trading Plan at all, then do make sure to add the final Ingredient, your system rules. I’ve not discussed any specific systems as every one trades differently. If you need to learn a system, then please look for a professional mentor or coach.

Thank you for reading this Special Series. Please feel free to share this if you’ve enjoyed the read.

 

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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