(A three-part Series)

 When the discussion of trading plans comes up every trader quickly thinks that these are plans for their specific strategy and pattern they trade.

Without rules, we are no different than lowly animals.

I am here to make you understand that this thinking is infantry because trading plans go deeper than that. What do I mean?

I love to think of trading plans as having 3 main branches which can never be put together or there will be confusion.

 Thus, every trader must separate their trading plan to fall under these 3 main categories:

• Psychological Plan
• Rules of Engagement
• Risk Management Plan.

Every trader needs to understand that these three branches of trading plans must have a separation of power and never be put under one umbrella as one trading plan, they are to be interdependent.

I will be going into each and breaking them down as seen below:

• Psychological Plan

1. How to deal with losses
2. Faith in your system
3. Anticipate do not improvise

• Rules of Engagement

1. Know your entry pattern
2. Know when to stay out of the market

• Risk management Plan

1. Amount risk per trade
2. System draw-down management
3. Trade management

My Two Cents.

Since this is a three-part series, we will be touching on this topic part by part over the coming weeks. Without further ado let us look at the first part of this three-part series.

Psychology Plan

 When the topic of psychology is mentioned in trading, everybody quickly thinks about how to not feel emotional and be like a robot. News flash, you’d not feel emotions, in fact throughout your trading career you will always feel stung by a losing trade, not sexy, is it? Veteran traders all over the world have said times without numbers that they still feel terrible after taking a loss, especially if it is taking a loss doing what they are not supposed to be doing, which brings me to my next point.

Also, when the subject psychology of trading comes up, people think it is getting to a point where they no longer make stupid mistakes and they have figured out themselves to the point where they would never do dumb-shit, another news flash my dear, you will still make stupid mistakes sometimes, Afterall, we are humans and emotions make us that so also would we make mistakes sometimes.

Well then, what good is proper psychology then?

This question brings me to the 3 main indicators a trader must have in his psychological plan, I will take the first one which is.

How to Deal with Losses

 The first thing every trader must know and come to terms with is that “you will take losses” and they are perfectly normal. There is no system out there with a 100% strike rate, you will have losing days and there is nothing you can do about it.

But one thing a trader should never forget is that since the possibility of losing a trade is inevitable then it is something we can’t control, so why not just focus on what we can control, which is how to deal with inevitable losses?

What is your reaction when you take a loss, what mood does taking a loss put you in, and how do you see the market after a loss? These are things we need to access within ourselves if we must learn how to deal with losses.

The typical trader will react with either fear or anger when on a losing streak, they will not have a fresh perspective on the next day following a losing one, they linger on the trade lost and allow it to cloud their judgment on the new day. It is important to know how to deal with losses when trading or else that will wreck you.

I do not have a degree in trading psychology, nor do I claim to be Mark Douglas or Randy Howell that is not the purpose of this article, I am just trying to educate you on the need to have a separate plan on how you deal with losses as a subsect of trading psychology in your journey to building a trading plan.

So how do we deal with losses?

Simple, when you take a loss, you move on!  What does moving on mean?

That is, required that the loss was not a stupid mistake and is part of the inevitable statistical possibility in your system, you don’t think of that sucker for another minute, and never let it weigh on you enough to determine the way you trade the next day, very important

Some may ask, “You said sometimes we might make stupid mistakes when trading, how do we deal with that one when it eventually happens” Well, it is simple, learn from it by journaling it and move on from it.

If you notice, I use the words, move on a lot, yes and this is because it is the inability to move on that wrecks us and not the initial loss whether it was a loss through the system that was inevitable, or it was a stupid mistake. When we fail to move on, we can enter into what traders come to call Tilt.

Traders Tilt

This is a dangerous state of mind caused by anger where, after a trader must have had a loss or series of losses and keeps trading, he or she enters into a mode where he is at risk of total account extinction, yes! A trader is capable of hurting himself this bad if he doesn’t learn to move on.

What other thing can, not move on the cause?

Fear of Entry

This is another state of mind that is not beneficial to a trader and it happens if a trader doesn’t move on, he hangs on to a previous losing trade to the point where he fears entering into the next one, this will cause a trader to leave lots of money on the table and when you are doing this you are messing with statistics, and you don’t want to do that. When your system tells you to buy, you do so no matter what especially when the other plans are in alignment with each other, you simply move on and take the next trade.

So, a remedial practice to Tilt and Fear of Entry is simply moving on.

Faith in your System

Another psychological plan every trader must have is, having faith in their system, when you have faith in your system, it stems from the very fact that you have done the necessary work required to know the statistics of your trading edge and being in truth with the terms that although there will be a rough patch whereby some strings of losses, over an ample amount of data you will be net profitable. That is the type of faith required in your system that should be included in your psychological plan.

Steps involved in building faith in your system:

1. Back-test and know the statistical edge of your system: when you do this you will realize that you are not fazed by mere losing traders because you know over a sizable amount of data you will win in the long run.

2. Take every trade your system dishes out so far it aligns with other plans even if the last trade-off that similar signal was a loss, this is important cause it will allow you to be consistent with data. This also blends in well with the theory of the coin toss, let’s say a coin represents the market and the toss is your system which says heads is a win and tales is a loss, if you have a 60 percent win rate and 2:1 reward risk ratio, even if the first 4 trades were losers and you eventually win the last 6 you will come out profitable at the end of that series. But if you got phased by the initial 4 losses, and didn’t take the 5th trade, you will be messing with your edge’s statistics, and this is a trader who doesn’t have faith in his system.

3. Never leave your system and hop to another one thinking your system is going through a tough time and it will take a while. This will mess you up in so many ways you can’t even imagine, because trading requires so many things in decision making and you don’t know another person’s process for that so when you strategy hop, you destroy all the work you’ve done on your system and start something new entirely requiring that you learn all the things that go into decision making for that new system, no other delay to progress and self-development than that.

Anticipate don’t Improvise

 Every system has its processes and set of things to expect before entry, hence you know what you are looking for and to see before deciding to enter a trade. If all your requirements aren’t met, even if the price moves without you, it won’t be wise to convince yourself to follow the price just like that. There are times when just staying out like that can save you from a painful loss and that would have been your system protecting you.

But when we improvise, we tend to do some dumb sh*t like

Fear of missing out (FOMO) which makes us:

1. Trade what is not there,
2. Adding to risk beyond planned for.

What is fear of missing out (FOMO)

This is a type of state of mind where a trader begins to doubt that his system will give him an entry, so he decides to just jump in on the market at the present price value even if it is far from where his system requires entry, (FOMO).

FOMO makes a trader trade what is not there, and you are supposed to trade what you see and not what you feel.

FOMO exposes you to larger un-warranted risk and this can make you lose more than your system will account for normally.

This concludes the psychological plan section and the need to have all these things in check before being in the market as a trader.

That Concludes the first part of our three-part series, see you next week!