If financial suicide is not the predominant reason for trading, then what could keep someone from doing something that would otherwise make absolute, perfect sense?
Doesn’t it make perfect sense to have a plan when trading? A well thought out direction for each and every trade. If so, then why do so many traders not have a plan.
One of the traits of consistently successful traders is they have a plan before entering a trade. They get out of a trade when their rules tell them to even though every fiber of their body tells them to stay in. They have a money-management regimen that will allocate only a certain percentage of their account to any one trade. (These are the Principles of Successful Trading [PST]).
Since most traders don’t adhere to PST, are we to assume that their true underlying motivation for trading is to destroy themselves? It’s certainly possible, but I don’t think so. The answer is quite simple: The typical trader doesn’t adhere to PST because he doesn’t believe it’s necessary. He doesn’t have an unshakable belief that anything can happen. He is acting as if he already knows, and if he already knows, then why do you need to stick to rules. Only when he establishes a belief that anything can happen, will he make the kind of decisions he needs to in order to become a consistently successful player.
THE ALGORITHM IS YOUR PLAN
An algorithm will force you to at least start with a plan that incorporates money management. It certainly can’t force you to stick to that plan but it does make it so you have to consciously decide to deviate from it. That alone can intimidate you enough to stick to it. Building, or using, an algorithm forces you think about the rules of your trading strategy before you put on the trade.
This is something all traders should do yet few accomplish.
When I started QiT, and before I started down the Yellow Brick Road that got me to where it is today, I was truly amazed at how many decisions had to be made before I was able to dissect my trading.
Let’s take, for example, a simple moving average crossover type of trade. Here is a short list of decisions you have to make before you even consider entering a trade:
- What timeframe are you using? Daily? Weekly? Hourly?
- Which Market are you going to trade? Equities? Futures? Forex?
- Which moving average type are you going to use? Simple? Weighted? Exponential?
- Which averages are you going to use?
- How are you going to enter a position? Market? Limit?
- What criteria will you use to exit a position?
- How are you going to exit a position? Market? Limit?
- Will you use a Stop Loss or a Dynamic Stop?
These are some of the decisions you have to a make if you’re trading your own simple trading system and you don’t want to backtest it. If you want to backtest it, there is an entirely new set of questions that need to be addressed well before you get to anything that resembles trading.
We’re the Plan in “Plan your Trade and Trade your Plan” – TraderJanie
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