Today, I plan to share the investment insights Benjamin Graham, Warren Buffet’s mentor, gleane...
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Five Tips to Help You Start 2009 with a Winning Edge! (Part 2)
01/13/2009 12:56 pm EST
Always plan your trade before placing your orders. Many traders like to trade “free form,” with no plan. These traders feel they have freedom to react to whatever the market throws their way. But there are two very important reasons why trading with a plan is a better idea: 1) Trading can be hectic, and 2) Trading can be emotional.
If you have an open position and don’t have a trading plan in place, when the market becomes overly volatile, you are left trying to make snap decisions. We have all recently experienced markets that were so volatile that it was difficult to tell where price was currently trading. Trying to make informed decisions and then execute them when the markets are volatile is a losing proposition. This often leads to excess slippage, or a failure to get filled on your orders because the market is moving so fast. And trying to type in orders while the market is moving extremely fast often results in errors. It is too hard to make money trading to give it away to execution errors.
When an open position begins to turn into a losing position, your feelings generally begin to cloud your judgment. Traders start to hope that they can hold onto their positions until the market turns back in their favor. If they have had a few losing trades in a row, some traders go as far as rubbing their favorite lucky amulet or praying to the trading Gods—and I am sure some would make a pact with the devil if they could get through to him! Let’s face it: When your emotions begin to cloud your mind, you don’t make the best decisions.
How can you best deal with hectic markets and the possibility of emotions clouding your judgment? Plan your trades before you take them. Write the trading plan out in detail. You’ll have a step-by-step guide for each trade sitting in front of you. Then simply execute the plan, step by step. By having a plan, you have the security of having the road map right in front of you. If emotions start to creep in and make you nervous, you simply look at the step-by-step plan and execute as you planned it. One of my students calls it “trading by the numbers.” This same plan will protect you if the markets suddenly get overly volatile. You’ll have your stop loss orders in place when you first enter the position, and then it becomes an exercise of following the step-by-step decisions you made before you entered the trade, when the volatility was normal. You won’t be forced to make snap judgments in a hectic market because you have the road map right in front of you.
A bad trade plan is better than no plan at all. With no plan, you are often forced to make snap judgments in volatile markets or when your focus is clouded by your emotions. I tell my students that their focus is at its best when they are first stalking a trade. As the stalking continues, and as the trade opens and unfolds, you spend more and more of your energy and ability to focus. Soon you are trading with half your original energy and focus, and that means you will be making decisions with half your original resources.
And don’t underestimate the value of having well thought out records of your trade entry ideas. If you keep detailed trade plans and records, you will truly be able to treat your trading as the business it is. Furthermore, at the end of each month, you should go over the statistics of your trading. By analyzing your trading results on a month-by-month basis, you’ll be able to see patterns emerge that will help you pinpoint your strengths and weaknesses as a trader. Once you learn to identify your strengths and weaknesses, you will be able to work on improving your performance in areas where you struggle as a trader. And you can play to your strengths by purposely choosing trading and money management styles that work well with your best attributes as a trader.
Every trader in my mentoring programs uses a trade sheet for every trade they take. At first, many find it cumbersome to write out their plan before entering a trade. But once they get into the habit, they begin to reap the benefits of having a detailed road map in front of them as a trade unfolds. And they also benefit from being able to analyze their trades on a monthly basis—which allows them to play to their strengths and work on improving their weaknesses. Begin using a trading plan before you enter your trades and you’ll soon see how much help a road map can be.
More tomorrow in Part 3…
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