I love the line from the movie Man in the Iron Mask where, D' Artagnan said
"When I draw my sword, I ask not what I am killing but what I am allowing to live".
After an eternity of costly losses, I now ask myself not
"What could I make on this trade?" but "Does this trade meet my trade plan entry requirements?".
It is so tempting to hop in when you see a run, especially if you had instinctively predicted that it would happen but that is what differentiates traders from gamblers. My experience to date has been that trading on instinct is gambling.
Planning your trade imposes various important "pre-launch" checks:
- Do you have a trade that you are comfortable with?
- Do you know your risk/reward ratio?
- Have you sized your trade appropriately?
- Have you predefined your exit criteria and/or conditions?
A trade is defined as a consistent set of signals and/or events that deliver a profitable entry and corresponding exit.
I will elaborate further in later posts but sizing your trade, or trade sizing, is basically adjusting your trade to what your account can sustain.
Trading your plan is the converse of planning your trade and is by far the more important of the two.
Having a plan is intent, trading your plan is discipline.
Simple as it may sound, this is one of the definitive lessons that will dictate your success or failure in this business.
The bulk of my personal trading disasters lead back to this one single factor, not having the discipline to trade my plan.
