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Trade Plan - My thoughts and experience.
  • : January 29, 2021
  • : Prashant Shah
Trade Plan - My thoughts and experience.
You must have heard “Plan your trade and trade your plan”. Many experienced traders, authors and analysts keep saying trade as per your plan.

You must write your plan of taking trades and focus on the execution. But you will not see many people really doing that - even many experienced traders.

Possible reasons:

  1. Lack of awareness – What’s Trading plan?
  2. Do not know how to do that or need guidance.
  3. We keep learning new things, making it difficult to stick to a plan.
  4. Like to rely on other’s studies and recommendations, no need of plan.
  5. Trading is art, not science.
  6. Technical analysis does not work.
  7. Do not believe in process because of the belief that market is a game of speculation, you need good judgement and information to make money.
  8. Lot of people share their studies and showcase their talent to predict. Hence plans do not necessarily work.

For point 1 –Trading plan is deciding your process of taking the trades. Which instruments or universe you will trade, what parameters, entry and exit conditions, position size, maximum risk that you will take, steps you will follow etc everything is mentioned in the trade plan. It should be a clearly mentioned and there should not be any ambiguity.

For 2- The format is easily available. We have got a good data to study this behaviour. We have been making people write trading plan since last many years. Sharing what I have learnt. Almost everyone likes the concept initially. We make the format available and explain them how to write it. We even give a sample trade plan. Very few however actually write the plan, and fewer still end up sticking to the plan for a considerable time.

Is trading a plan same as trading system or Algo trading? Trade plan is a pre-requisite of designing an objective trading system or Algo.

For Point 3, 4, 5 - Trade plan can be prepared for all types of traders and investors. Example – deriving tradeable ideas based on chart analysis can be a part of entry conditions. ‘Friend ne bola’ can be an entry condition. Gradually it will keep improving. We keep learning and evolving and the plan or process is an integral part of this improvement process. Remember, your plan will also undergo changes and improvement if you maintain records and do review of your trades.

For 6 – It is not only about Technical analysis. Major portion will remain in 7 & 8, they will grow.

Mentioning the thought process clearly on paper will allow us to prepare a check list. That will allow us focus on the process rather than the outcome. It will allow us taking our position sizing in control.

There should be rules to restrict the number of trades in order to curtail over trading.

I believe in allowing some conditions in Trade plan which cant be clearly defined. Eg: I will study the market phase and then decide the trade. Because I may not be clear right now about how to define the market phase. If I find some way to define it, I will add that in the plan. – This way, I will know my pain areas as well.

Practical trading has a lot to do with handling the emotions – Trade plan is a good tool to organise ourselves. Think about this. If everything happens as per my like, wish or passion – there is no need to go to the school in the first place.

There are endless techniques, methods, and market experts. Trade plan is an essential tool to regulate our thoughts and remain focussed.

There must be a separate plan for each time frame and instrument. If you learn a new method – study, get convinced, write a sample plan, and test it. Do not fiddle with your active and tested plan. Test the new method separately with extremely limited risk to begin with. Remember, markets are dynamic. There are different phases, high volatility, low volatility, trending phase with different volatility signatures and event days. A trade plan should have provision for dealing with all or at least most of these scenarios.

Lot of experienced people rely on their judgement which they have got after years of practicing. You need to survive till you develop that. As they say, initially in markets you have money, no experience. Later, you have lots of experience but no money. Let that not happen.

I have learned the hard way that trading the markets does not need good analysis or prediction. Trading can be treated as a business which needs well defined process and execution.

I have thoughts on types of plan. Even after reading about the plan and having the format, it may still be difficult to write a plan and / or stick to it. If you can manage to do that, you will gain a significant edge in the business of trading. I strongly advocate process-oriented trading. Trade plan is an important part of it.