Increase Your Trading Success with Careful Planning

planning

Many amateur traders do not understand that trading (including understanding entry and exit rules) is only a very small part of trading. In fact, I wrote an article on “Why a Good Trading System is only 20% of the Game?” (see article) to explain my point.

I would like to reiterate my point and also introduce to you the idea of 20/80 trading rule. Bear in mind that this is not exactly the Pareto principle but it is somewhat similar. In my view, 80 % of your trading success is derived from:

  • 20% of Trading
  • 80% of Planning and Management

With that, I will be sharing with you how I plan my trades and hopefully you will be able to incorporate it into your own trading.

Anything Can Happen

Before I begin, here is an important point that you should know. The first point in the 5 Fundamental Truth about Trading (see article) is that “Anything can happen”. Quite philosophical right? But before you start having funny ideas, always remember point 2 – you don’t need to know what is going to happen next to make money.

This is an extremely important point because many new traders want to make money quickly. However, they do not quite grasp the idea of probability bias and statistical outcome. Hence, when they plan their trades, they have huge expectations that the next trade have to be profitable.

Yeah, some of you will say that you get it. But let’s just check.

How many of you were excited/stressed/annoyed/sad about your last trade? If you have any of these emotions, then trust me, you still need to work on it because accepting that anything can happen means you will also learn to expect nothing from the market. If you have nothing to expect, then there should be no emotions at all.

Finding for your Edge in the Market

I hope the name of my website carries enough weight for you to realise that successful trading is about trading your own edge. I cannot emphasise enough the importance of knowing your trading edge. By that, I mean that you should trade what you belief and what you have seen in the past that will work well for you. Above and beyond that, your edge should be in the form of a unique information that will give you the above average probability to win.

Once you know what your edge is, the next step forward is to find it in the market place. Make sure that you are diligent in the search because, while you don’t have to be in the market all the time, missing a trade is an opportunity cost lost.

Double Bottom

For example, I am a technical trader and my edge lies in trading chart patterns. I have a set of patterns that I trade and those are the only patterns that I take and nothing more. Above is an example of one pattern on my list – a classic double bottom price pattern.

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GBPUSD double bottom - 1

With that in mind, I search for the patterns that I want in the market place. On one instance, I found the pattern on GBPUSD (see above).

The first thing to do is to check that the pattern was correct. This may sound obvious but many traders actually jump into a trade because the set up looks somewhat similar to what they are looking for and they take the trade without checking (again, the benefit of having simple rules makes it easier to get it right). Once I was happy with the pattern, I made a note of it and I start planning.

Planning the Entry

The real work begins from here because finding the pattern was only the first part of the job. I start planning my entry now. For me, since I’m a chartist, I try to visualise the pattern that would allow me to incorporate my beliefs, risk management and money management. The considerations that I need include:

  • My trading beliefs – a double bottom is a reversal pattern and I am a with trend trader. I will not take a double bottom trade at the bottom because that goes against my beliefs of trading with-trend.
  • A low risk and high probability trade – while the pattern is a double bottom pattern, there is no guarantee that price will reverse. Based on the chart above, price could easily enter a range market and continue south. In my view, that’s not a high probability trade.
  • Money Management – I am quite clear of my money management at this stage. However, I need a set up that will give me a good reward to risk ratio. Think about it, if I want to risk my money in the market, I need to be clear that I am getting my returns at a certain level. More importantly, this needs to be inline with the statistical model of my trading system – the long term probability of success needs to be in my favour.

Note: Please do not pay too much attention to the technical set up that I have written as everyone has different rules for trading. However, do understand the elements involved when considering taking a trade. I am a strong advocate that trading beliefs, risk management and money management are much more important than the technical know-how. If you have other elements that you feel is important, make sure to include it in your planning process.

Build the Road Map

Taking into consideration all the points above, I then visualise or forecast (by drawing on my chart) the set up that I consider an ideal trade. This is what I call the Road Map.

Remember that nothing is ideal but having a visual and mental preparation is crucial in the trading world. The road map is important because it pretty much sums up when and how you should enter the market. 

GBPUSD double bottom - 1b

The above was the outcome of my road map. It is where I would like to enter the market (yellow circle) as I believe it fulfils my entry requirements.

Note: Visual road map is just my illustration. You could potentially use a checklist as well. For example, a fundamental trader might only take a trade if P/E ratio is at a certain level. 

Trade the Plan

Assuming that you have made every effort to plan your entry, all you need to do now is sit tight and wait. Trust me, this is the hardest part of the entire process. Yes, let me say it again – it is the most challenging of the entire planning process because, some times, you won’t get the Road Map that you want and all the effort of planning is unrealised.

However, traders forget that the road map is actually a summary of your trading edge. Think about it, and read the entire article again if you have to, your entire market belief (repeatability of market behaviour e.g. patterns), trading belief, risk management and money management is now in the road map. If you fail to follow it, it means you fail to follow your edge.

GBPUSD double bottom - 3

Fortunately, in this example, GBPUSD showed how price did respect the pattern as well as my road map.

Conclusion

80% of trading is really about planning and management. In this article, I have illustrated how I plan my trades based on my rules. Feel free to use the same framework or a framework that you may already have. Make a conscious effort to plan your trades and then trade your plan. If you keep doing this, it will definitely increase your trading success in the long term.

Hope you enjoyed this article. Thank you and have a good day.

 

 

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2 Comments

  • Monica Revill

    Reply Reply June 7, 2013

    Great article!! You write in a way that is very understandable!

  • Alwin Ng

    Alwin Ng

    Reply Reply June 7, 2013

    Thank you Monica!! 🙂

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