Trading is not gambling. No matter the kind of trader that you are, longer trader, or shorter trader, you must have a trading system and trading plan. You must stop believing and listening to those economists or financial analysts who have never invested or traded their own money, and who don’t know what is to put their capital at risk. Still, their job is to make analysis and criticize things from the outside using fundamental theories instead of practical experience.
Before the main subject of this article, I would like to quote an incredible paragraph that means a lot to me. I am sure you will enjoy it.
“It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at best knows, in the end, the triumph of high achievement, and who at the worst, if he fails, at least fails s while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.”
Develop Your Trading System/Plan
There are many trading systems and trading plans out there. None of them is better or worse; the critical thing is that it must suit your personality and your mindset.
It doesn’t matter how good theoretically some system/plan is, if it doesn’t fit your personality or mindset, it will be a complete failure to your trading.
The first thing that every trader must do before starting opening positions in the market is to take the time to find the proper system/plan.
The first element of any trading system is the trading plan.
But what is a trading plan? A trading plan is to have a strategy that is tested that works overtime, and you can execute it continuously following a specific set of rules.
Why most of the retail traders around the world fail as traders? Because most of them do not have any trading plan. Most retail traders do gambling. They don’t have a trading plan to follow, so they do not have a trading system that works for them.
If you play the market without having any trading plan and any trading system, you cannot get consistent results because you are just gambling. When you have the desire to make money out of the market without a system/plan, after a few trial and errors, your emotions will invade you. Once your inner emotions become with the same volatility as the market, your game in the market will become chaotic. You can get lucky sometimes, but at the end of the day, you will end up losing as you would do gambling in the casino.
You need a system/plan to get consistent results.
Any good trading plan should always present these following elements:
Which Are The Instruments You Want To Trade, And When Do You Want To Trade Them?
a) Financial instruments: Stocks, ETFs, Options, Futures, Bonds, Cryptocurrencies, etc.
b) Time Frame: which period do you want to work with? Monthly, weekly, 3Days, Daily, 8 hours, 4 hours, 3 hours, 1 hour, 30 min, 15 min, 3 min.
The first element of any trading system is the trading plan.
a) Fundamental Analysis: Cash Flow, Earning Reports, PE, PEG, etc.
b) Technical Analysis: Fibonacci, Moving Average, ATR, Gann Theory, Ichimoku, Pivots, Fractals, VSP, etc.
a) Stop Loss:
A Stop Loss is vital for succeeding in trading. A stop-loss is a tool that allows you to get out of o trade when you have been wrong about the decision making.
Some experts don’t like to use the term “stop-loss’. Instead, they use “stop” because they say that traders have a negative mental perspective when it comes to using stop-loss because of the word “loss.” In my opinion, any trader should prepare mentally to accept losses.
Losing in trading is a critical component of the discipline; losing is part of the game. Losing in trading is the same as an egg’s factory. The fact that they have to orders inventory, and it has a cost for it. Also, it will have operational costs, such as broken eggs. When it comes to trading, it is the same as many other businesses; you must calculate your Risk and anticipate your losses, and you must accept and set up how much you are willing to lose.
b) Profit Target:
Believe it or not, some people forget about the price target for taking profits. This aspect is the same important as the stop loss. Some people say that this isn’t the same crucial a stop loss. I do believe it is, you should know your target and at which price you would want to get out of the trade.
c) Position Sizing
Position sizing is critical if you don’t want to blow up your trading account. This aspect is one of the most difficult to manage and to master at the beginning. However, to master the right position size is vital for your sustainability in the long-term.
There isn’t one single strategy for position sizing, which is perfect. Every plan has its advantages and disadvantages. The most important thing is that you find the one who suits your mindset, personality, and risk aversion.
d) Money Management
The risk-reward ration should be like the “bible” of every trader.
The main reason why the risk/reward ratio is crucial because, as a professional trader, you are trading a ‘trading system.’
What are the advantages and what are the main objectives of any trading system? The main goal is to maximize profits from the markets when you take the right trades and minimize losses when you have made wrong decisions.
Any trading system to achieve this previous successful trading method must have a risk/reward ratio to one or less than one. It is essential to realize that it won’t always be like this; some trades can be and should be more significant than one. A big part of every successful trader and the trading system comes when you achieve to have a system when most of the time, your trading system has a risk/reward ratio to one or less than one.
–Risk per trade:
Risk per trade also matters a lot, because you are trading a system, and you aren’t gambling in the casino.
The Risk per trade ratio defines the maximum Risk that you, as a trader, are willing to take. Typically, the longer time frames you trade, the higher the Risk per trade will be compared to shorter time frames.
–Risk per month or ‘drawn down’:
The Risk per month ratio means that you must measure the % of trading capital you have for trading.
It would be best if you calculated the capital you can risk for trading so you won’t run out of money for the next trading month. Always have in my mind that capital for a trader is like oxygen for a human; without capital, you couldn’t survive and keep working. You must take care of your money and calculate the margins correctly because there will be some months where your net profit will negative (like any other business). Here it’s where you must have the proper trading system, so when the lousy period occurs, your losses are minimized, and when you have an excellent trading period, you maximize profits.
e) Exit/Entry Time: Most strategies focus on time. The main reason for this is that, depending on the time during the trading season, the volume level can change dramatically.
You must know that other strategies don’t consider time as an element, only volume.
Post Analysis Trading Evaluation
(2)Profits and Loses Analysis.
This kind of information and data that you must write down will tell you if your trading system is working correctly. It will give you the proper information about the things that you must keep doing, and also it will provide you with information on the factors and elements that you must adjust.
The main reason for recording your trades is to ‘backtest’ your trading system.
Like any other business, you cannot guarantee with certainty your future results. However, you can increase the probabilities for success in the future if you have developed a robust long-term trading system.
Check out the previous articles about technical analysis if you missed them: