In the early days of this site, I was asked a generic question from one of these large, mostly online financial publishing companies. It was something along the lines of “What's your best piece of advice for anyone starting out in trading?” Hastily, I answered, and forgot all about it.
A few months later I received a reply, with a link to the post. People were asked to vote on the responses. Mine was sitting down somewhere around the bottom of the pile.
The top response was from a guy who I knew was basically an online hustler, but his answer beat everyone else's by a longshot. I'm paraphrasing, but it was basically “Have a trading plan, and stick to it”.
I guess there was a reason he was so popular…..he knew what people what people wanted to hear.
And the reason I am writing this is because I was again on X and conquering everyone's post along the way was one in regards to trading plans (and naturally, how you're an absolute moron destined to fail if you don't have a carefully mapped out strategy and follow it to a T).
But how is that possible? I have now known a good number of “absolute morons destined to fail” who have fared far, far better than any of these people.
I think the reason “have a trading plan, and stick to it” resonates with so many is because they just jump around when it comes to entry strategies (this is an issue primarily for newer and intermediate traders).
Ask anyone who has been trading for years and they will tell you that they have been to hell, and back. But they always end up……….back.
And what's typical is that in the early days of development, we oftentimes dismiss strong, fundamental truths about what we're looking at for the girl in the red dress. Most of what I do nowadays can be boiled down to basic volume and price analysis. Most other things I have I can use, but don't “need” them.
But as I discussed last week, entry strategies are rarely the problem. Overtrading is the other one. And overtrading is symptomatic of excess emotional expression.
But is a trading the answer to either one of these? No, not usually.
I've always viewed a trading plan as nothing more than a compass that keeps you on track, and avoids the chaos. At least in my own opinion, it should be nothing more than a simple set of instructions, clear, and void of redundancy. In other words, you should not be dragging in information that's not part of the script. This isn't an improv comedy hour. And if at some point you discover something of higher weight, relevance, that's fine. But it shouldn't be the cause of derailment.
You are not suddenly going to become a Harvard researcher turned RenTech PM by staring at social media and looking at what every other human being on the planet is for analysis. Essentially, you will only change so much, no matter how much time goes by. Your tendencies and strengths will be built upon, but your foundation really doesn't change much. So essentially, go for the things that suit you. The things that make sense.
Remember, you're the only one looking at it. We are used to writing for others and I've seen trading plans written to impress, and it is clear the person using it isn't actually using it.
I've always viewed trading as a 3 step process. For the purpose of a plan, you're looking at analysis, execution and risk management.
Analysis is where we arguably spend too much time, but in the beginning, rightfully so. We want to understand something as fully as possible but in order to do that, we hop around a lot in the early years of experimentation. Again, this should be a short list of items, ranked in terms of weight. Certain factors are 100% more important than others.
Execution is just that: your plan of attack. Pretend these three steps are instead people. You have an analyst, an execution trader, and a risk manager. The analyst relays relevant info to the execution trader, who then uses his short term expertise to pull the trigger and achieve a profitable outcome. The execution trader is void of most analytical knowledge and has to follow the instructions of the analyst to the T, not changing the plan, because he is not…….the analyst.
After trade completion, you then have risk management. This is metric assessment. Again, just a short list of items which get to the point when it comes to understanding how to improve your risk and ultimately, P&L. Any backtester and basic risk/reward principles will guide you on this one, particularly for short-term trading. Generally speaking, portfolio management is a different ballgame when it comes to metrics.
I'm trying to keep this brief, so I'll skip right to the point on this final matter: make your list as small as possible (not wordy). Bulletpoints are fine, and should not require in-depth explanations. The entirety of your plan should be limited to a single page, most of which is empty. The more abbreviated, the better. It's essentially a shopping list of what you're looking for when you go out and look for opportunity.
Packing your plan with charts, extensive outcomes and other forms of research, etc. is not a plan. You have just made a textbook which you can use for future study. And that's fine too, but try to bear in mind what it is you're making.