In the stock market, the decisions of millions of investors, traders and speculators, are played out. These decisions to buy or sell affect share prices. There's no telling who will be in the market and who will not. And
when they are in the market, whether they will be buying or selling. Hence, in the stock market, anything can happen. Because anything can happen, we should prepare for any eventualities. The blueprint to prepare for these eventualities is call a trading plan.
The first rule to remember when preparing a trading plan is that the user of the plan must be the person who is preparing the plan. This means that if you are the one who is going to execute the plan, then you must be the one to write out the plan. Of course, you can seek help, inputs and feedbacks from others, but ultimately, you must own the plan.
Why is it important to prepare the trading plan yourself? A trading plan guides the trader into making prompt decisions and executing the trades without procrastination. He or she must have faith in the plan, and hence, will not waver with indecision and fear of uncertainty. Lets get this straight: a trading plan does not eliminate uncertainty, but it certainly will prompt you to act when market conditions call for action.
Will you have confidence to act when the plan is prepared by others?
More importantly, a plan prepared by others may not suit your psychological and risk profile.
For example, I make profit in almost 100% of my trades. How do I do that? Simple. My plan prompts me to sell at 2% profit and cut loss only when the stock is down by 25%What? What kind of expectancy is that, you may ask. You need 13 wins to match 1 loss just to break even. No one would be able to make profit with such a plan.
It would be more accurate to say that no one ELSE would be able to make profit with such a plan. But it is my plan, I design it so I know how it works. I know its strength and limitations. Hence, even though one loss
may potentially wipe out the gains of 13 wins, I can still make profit when I play it according to the way that I designed it to be played. But is such a plan suitable for everyone? I don't believe so.
And how do you feel emotionally when the market goes against you by 10%? 15%? 20%? 25%?
This is not the place to go into how to construct a trading plan. Rather I want to emphasise the importance of having a trading plan that is prepared, constructed and executed by the owner of the plan. It is a job that you cannot delegate to others. You may get all the help you need, read all about it, experiment, etc, but ultimately you must put it together yourself so that you are confident of its strengths and shortcomings, confident to the point where you would not hesitate or procrastinate when the plan calls for action, and you would not be impatient or impulse when the plan says to wait.
No one else, except yourself, can develop a trading plan that will work for you.
