Trading Plan Benefits
Posted on 01. Mar, 2010 by Global in Uncategorized
Many traders make the mistake of not outlining trading systems. Not having one can increase the possibility of trading purely on hunches. While this may work for some traders, it isn’t exactly the best long term strategy to adopt. Making trading picks with your eyes closed is like entrusting your future entirely on luck. The fact is, lady luck can sometimes be a bit fickle.
There are other disadvantages to not having a reliable system. Aside from allowing luck to take over your trading decisions, the lack of a plan can push you towards trading using your feelings. You could for instance, choose to make decisions based on what everyone else is doing because you don’t want to feel like you are losing on an opportunity. You could also start make mistakes in holding on or letting go of assets because you are afraid of losing money.
The best stock trading system eliminates emotional trading patterns. A good plan lets you open and close deals based on what is logical. To genuinely succeed however, you need to take the extra step of committing to your plan. This is even if you foresee some possible losses closing in.
It’s easy to make promises to stand by your system. It is however, easier to follow through on your promise if you know that your plan has a high chance of succeeding. Once you know that you plan works, you will begin to gain the right degree of confidence that will help you keep your promise.
How do you make sure a system will work? The only way is to subject your trading plan to back testing. This technique involves trading using a plan and previous trading data. In short, back testing will let you determine how well a plan would have functioned if it were used in the past.
You can manually back test your system. This however will most surely be a labor intensive task. Moreover, it might be a particularly difficult choice because you may not always have access to the necessary data for testing. An alternative to manual testing is to use a software tool. There are a couple of tools available online that you may want to try. Some of these offer their own sets of data. It is often better however to settle for programs that are compatible with third party data providers so you can choose those that provide the kind of data that are specifically important for you.
Back testing is not the only trading tip that you need to consider when looking for a system that works. You also need to make sure that you settle for a system that matches your specific trading goals and risk management guidelines. In other words, it is often a good idea to avoid following a popular and successful system in its entirety even if other traders have found success with it. Although it isn’t a bad idea to pick a few insights from tried and tested plans, make sure that the resulting system is one that is designed for you.
There are some who claim to hold the secrets to the best trading system on earth. Bear in mind though that the real best plan is one that is tailor-made for you.
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