Do You Have a Plan?

You should avoid trading without a plan. A common cause for trading problems and failures is the lack of a trading plan. Your trading plan should explain clearly how you will trade. You must specify the markets, number of contracts, type of orders, entry rules, exit rules, and risk-con­trol rules. The more specific you can be, the easier it is to implement the plan. If you have specified and designed your system properly, defining and implementing a plan should be relatively easy.

Every football team makes elaborate plans for their games. For ex­ample, one championship football team would "script" the first 15 plays for every game. After careful research, the coaches would pick the first 15 plays ahead of time. Then, the players would practice these plays many times so that they all knew them well. On game day, every one could concentrate on executing those plays, with excellent results. This example points out the benefits of preparation. You can plan your trades, visualize how you will execute those trades, and then monitor how you executed the trades. This process of auto-feedback can help you improve as a trader.

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You should plan for adversity. For example, are you ready to absorb a 20-percent drawdown in equity? Do you have a plan to cope with this sort of drawdown? For example, you may not be prepared to experience a 20-percent drawdown in the first 3 months of your trading. If such losses occur, would you modify your trading system, change your money-management and bet-size algorithms, or change the portfolio mix? Similarly, if you are up 20 percent, will you alter any of the same variables?

Scenario planning is common in the military across the world. You, too, should use your imagination to explore good and bad scenarios about your trading. You can then develop detailed plans that will help you cope with the ever-changing markets.