When Is It Time to Make Changes to Your Trading Plan?

04/05/2010 11:09 am EST

Focus: STRATEGIES

I often write about the importance of having a detailed trading plan. I simply think a detailed trading plan is essential to long-term success in trading. However, I believe that a trading plan should slowly evolve over time. It isn't easy to change your plan, especially if you have been doing the same thing for a long time. Furthermore, it is not smart to abruptly change a key aspect to the plan based on incomplete information. Of course, if you wait too long to change your trading plan, you might not have any money left to trade when you finally do make the adjustments. Below, I will go over some of the basics when it comes to changing your trading plan.

First, how do you know that your trading plan needs to be tweaked? The first step is to track your results. If you don't track your results, it is impossible to make any educated changes to your plan. I think it is pretty tough to remember your results beyond your past five trades. Therefore, those recent trades have a large impact on how you feel about your trading. Obviously, this is too small of a sample size to make any changes. That is why it is essential to track results.  All that you have to do is make an Excel spreadsheet. The basic columns to include are date, symbol (or currency pair), action (buy or sell), lot size, risk (in dollars), reward (potential gain if the trade wins), result (in dollars), equity (how many dollars are in your account), and notes. Of course, you can add all sorts of statistics that can provide more information, but this is a good start. This is obviously based on system where you plan out the trade ahead of time (entry, stop, profit target) with a set percentage for each trade. Hopefully you are already doing this.

Now that you have some data, what do you do with it?  First, I wouldn't make any changes at all with less than 20 trades recorded. Ideally, you would want more than that, but 20 is the minimum. I think 50 trades is probably a better number to shoot for. Flaws in your plan should become obvious by looking at your past 20 results. Are you managing your risk properly? Did you give back all of your profits because you refused to close out one trade? Do you have a bias towards making poor decisions on "short" trades? There are a bunch of questions that pop up as you look at the data. Once you identify the problem, the next step is to fix it.

It is important to only change one aspect of the plan at a time.  If you change three key aspects to your plan, it is almost impossible to tell which changes were beneficial. You have to isolate each issue and change them one at a time. So, once you identify the problem, then you should identify the one change you can make that you think will help the most. After that change, you want to have a bare minimum of 20 trades before you try another change. If you are changing the plan more often this, how can you ever expect to know what is actually working? 

This may seem like simple advice, but I have a feeling a lot of people change their plans without any discipline. Tweaking your trading plan one step at a time with a decent sample size of trades is essential to effectively updating your trading plan.

By Bradley W. Gareiss of GFTForex.com

Related Articles on STRATEGIES