Hi, everybody.
How many times we've been telling this phrase to ourselves? Why really small amount of traders have a trading plan and able to follow it?
First, let's define what trading plan is.
It is set of rules that describe your entry, exit and position management technique.
It's important to distinguish mechanical trading system and discretionary trading plan.
Mechanical trading system describes setups in very detailed mode, often it looks like "buy when MACD crosses it's medium line after sequence of 3 white candles closing at upper 75% of their range". This detaliization at the first sight simplifies work of a trader, but it offers less flexibility, you can't just adapt your trading system to recent changes in market activity - you should design a new one.
Trading plan can be less rigid in describing your actions. For example: "Buy after pullback, when price breaks out from the trading range and we've seen signs of big money accumulating before". This describition does not stick your attention to bars, candles or color of indicators. You can be more flexible with your decisions, yet you know the price action you want to capture.
How to know what plan to trade?
First of all, it's useful to analyse - what trades can be done over there?:
1. Breakout momentum trading.
2. Trading pullbacks on stair-stepping trend
3. Fading breakouts
4. Trading sideways market
There are other trading styles but basically every trade is a variation of one of those trades described above. To be able to consistently follow your trading plan, you should decide - is your trading style for you?
Every style is absolutely not easy, and your should find that frustration you can live with.
1. Breakout momentum trading.
If you like fast markets and don't want to "nurse" bad trades, probably this is for you.
Your profits will be relatively small (you will take only 20-30% of the whole trend, oh my God).
Drawback of this style - leaving some money on the table, benefit - perfect timing of the trade. In most cases you will know pretty fast whether you have winning trade or not. Also, in most cases you can at least cover your risk when you are wrong.
To trade this way, you should have a lot of patience and ability to pull the trigger when moment comes.
2. Trading pullbacks on stair-stepping trend
The obvious benefit of this trading style - maximized profit because you get good, often best prices that market can provide. Best winning trades can look very attractive - bought low, sold high.
Drawback - you go against the market, you can be wrong about how deep correction is or is it a correction at all. You should be ready for some frustrating situations when market takes your stop and finally goes in your favor.
For example in momentum breakout trading you can close your bad trades to breakeven in 80% cases. When you try to trade pullback, you may be stopped out quickly and several times in a row.
3. Fading breakouts
Same drawbacks and benefits like in pullbacks trading. You go against the market, you may be wrong very quickly but you can get very quick nice profits. Also you should have very good timing for your trades.
4. Trading sideways market
Sideways markets are often dull enough, but some traders like this slow tempo.
Benefits: you can have enough time to enter a trade, you might not sit neat the monitor, most of the time you can use limit orders in "set and forget" mode.
Drawbacks are wide stops, slow tempo (you don't know whether you are right ot not quickly).
So, you should decide what trading style matches your personality.
Of course, there can be sort of combination of one and another, but think about your "A-class trades". What do you expect it to be?
Good luck!
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