# Mastering Your Trading Plan: The Key to Success in Investing
Written on
Chapter 1: Understanding the Importance of a Trading Plan
Imagine having an ideal trading plan that aligns perfectly with your lifestyle and psychological needs. However, if you lack confidence in your strategy, you might find yourself questioning its effectiveness. Do you adhere to your trading plan, or do you often close winning trades prematurely while allowing losing trades to run their course? This struggle is something I have personally encountered.
Why I Chose Trading
I ventured into trading as it appeared to be a highly rewarding side hustle. The prospect of earning just 1% profit holds significant potential; for instance, a 1% gain on a $1,000 account translates to $10, whereas the same percentage on a $100,000 account amounts to $1,000. This kind of leverage on my time is invaluable. Should I succeed in establishing a trading career, I could escape the confines of a traditional 9-to-5 job, allowing me the freedom to enjoy life fully. Picture this: a spontaneous day trip to Japan for sushi, returning home to sleep in my own bed. My aspiration is to achieve remarkable success, ensuring financial comfort to pursue my desires, like purchasing the latest iPhone without worry.
The Strategy
My strategic goal is to grow my prop firm-funded account to seven figures while achieving consistent four-digit monthly payouts. I also aim to cultivate my personal trading account using profits from the prop firm. I’ve crafted my plan meticulously to stay on track toward my goals, employing a step-by-step method. Additionally, I have contingency plans in place; if trading doesn’t pan out, my day job serves as a safety net. Prioritizing survival is essential; if you are preoccupied with basic needs like food and bills, it's time to reassess your focus.
Your trading plan mirrors your career plan. You establish entry criteria, and upon receiving confirmation from the market, you execute trades. Similarly, you have guidelines for when to close trades, adjust stop losses, or take partial profits. A clear method directs your trading decisions.
Be honest with yourself: how many times have you strayed from your trading rules this month? For me, the count is three, primarily due to greed, overconfidence, and unrealistic expectations. When faced with tight stop losses, I hoped the market would behave as I anticipated. Everything seemed aligned—multi-timeframe analysis, liquidity, and volume pointed to a high-probability trade. However, just moments before a significant news event, my trading plan advised me to close the trade, but I ignored it. In a moment of adrenaline, I succumbed to the market's volatility, resulting in a loss far worse than I had planned.
The Compounding Impact
While a 3% loss might seem insignificant, multiple such losses can quickly accumulate. For example, three similar trades in a week could result in nearly a 10% deficit, which can severely impact your trading psychology. Engaging in high-risk trades may feel justified, but they provide no guarantee of long-term success. The unpredictability during major news releases can lead to rapid price movements, often catching you off guard.
By consistently deviating from your trading plan, you risk forming detrimental habits. Such practices can lead you to rely on gut feelings and emotions rather than a well-tested trading strategy. This reliance on luck is not sustainable; negative habits can result in over-leveraging and excessive trading, ultimately driving your account balance downward. Instead, aim to build positive habits that contribute to your account's growth.
The Dangers of Deviating from Your Plan
Engaging in trades that stray from your established strategy—even if they yield profits—can be dangerous. These "lucky" trades can inflate your ego and lead to more reckless decisions. When luck runs out, you may find yourself losing more than you win.
To achieve success, you must recognize and eliminate bad trades from your portfolio. Often, your trading results will improve simply by cutting out these detrimental trades. Enhancing your risk-to-reward ratio is just one avenue for improvement.
Success is built on consistency and repetition. If you aren’t committed to putting in the work daily, you’ll struggle to succeed. Achieving your goals requires dedication, even when no one is watching or holding you accountable. Eventually, your hard work will lead to that “overnight success” everyone talks about, but it won’t come easy.
A Transformative Journey
The turning point in my trading journey came when I began to outline my life goals. At 30, I realized I didn’t want to spend the next 30 years confined to a 9-to-5 job or battling through crowded public transport to work. I meticulously mapped out my personal finances, which is crucial for my trading career path. Understanding my monthly financial needs—let's say $3,000 for a comfortable lifestyle—allowed me to establish a trading strategy that could yield an average of 2% monthly returns. This means I would need a trading account of about $150,000, achievable through funded prop firm accounts.
I set a one-year timeline to secure a funded account and earn my first payout. I started small with $10,000 challenges, adhering strictly to my backtested trading plans. I allowed myself the grace to fail, budgeting for challenges each month. While I faced numerous setbacks, perseverance eventually paid off.
On May 3, 2023, I received my first payout from a prop firm: a modest $200. However, it proved that following my trading plan could yield real results. I'm still committed to this process, and I look forward to another payout next month.
The Psychology of Trading
Henry Ford once said, “There are two kinds of people: Those who think they can, and those who think they can’t, and they’re both right.” The path will not always be easy. Consider that attaining six-pack abs requires hard work and unwavering commitment over time. People often seek instant gratification, but the challenge of achieving a six-pack is precisely what makes it desirable.
Similarly, if trading were as straightforward as following a plan, everyone would be successful. The reality is that 95% of traders lose money. While creating a trading plan might be simple, executing it consistently is where the real challenge lies.
What will you do if you face a losing streak? Do you have the mental fortitude to stick to your plan when things get tough? Do you ever doubt your strategy?
Crafting an Effective Trading Plan
- Chart Analysis: Identify key areas such as liquidity zones, points of interest, and market direction. Conduct your multi-timeframe analysis.
- Set Alerts: Create alerts at your identified points of interest.
- Document Analysis: Note your expectations on the chart—what you anticipate will happen when the price reaches specific levels.
- Confirm Analysis: When an alert triggers, revisit your chart to see if your initial analysis still applies.
- Risk Assessment: If your analysis holds, determine your stop loss and profit targets. Ensure the risk-to-reward ratio is acceptable before proceeding.
- Trade Execution: Calculate your lot size based on your risk management strategy.
- Manage Your Trade: Decide whether to actively manage your position or let it run its course, based on your backtesting.
- Journal Your Trades: After each trade, document your entry, exit, emotions, and outcomes.
The Role of Mentorship
Developing a trading plan is just one piece of the larger puzzle. Trading strategy and psychology also play crucial roles in determining your success. Throughout my trading journey, I have benefited from the guidance of various mentors, each contributing to my growth. Without their support, I might still be searching for the elusive “holy grail” of trading.
Currently, I offer mentorship opportunities for those interested in enhancing their trading skills. Please note that there is a screening process, and not everyone will be accepted. You can learn more about the program here, but spots are limited, and prices will increase after each cohort graduates.
Essential Videos for Aspiring Traders
A Complete Trading Plan: What to Include So You Trade Your Best
In this video, discover the essential components of a successful trading plan that can help you maximize your trading performance.
How to Build Your Trading Plan
Learn practical steps to construct a robust trading plan that aligns with your personal goals and trading style.
Originally published at http://keeleytantrading.wordpress.com on May 28, 2023.