A trading plan is a written set of rules that specifies a trader's entry, exit and money management criteria. Once a plan has been developed and back testing shows good results, the plan can be used in real trading. The key here is to stick to the plan. Using a trading plan allows traders to do this, although it is a time consuming endeavor. Taking trades outside of the trading plan, even if they turn out to be winners, is considered poor trading and destroys any expectancy the plan may have had. With today's technology, it is easy to test a trading idea before risking real money. Back testing, applying trading ideas to historical data, allows traders to determine if a trading plan is viable, and also shows the expectancy of the plan's logic. In order to be successful, one must approach trading as a full- or part-time business - not as a hobby or a job. As a hobby, where no real commitment to learning is made, trading can be very expensive. As a job it can be frustrating since there is no regular paycheck. Trading is a business, and incurs expenses, losses, taxes, uncertainty, stress and risk. As a trader, you are essentially a small business owner, and must do your research and strategist to maximize your business's potential. It is important to stay focused on the big picture when trading. A losing trade should not surprise us - it is a part of trading. Likewise, a winning trade is just one step along the path to profitable trading. It is the cumulative profits that make a difference. Once a trader accepts wins and losses as part of the business, emotions will have less of an effect on trading performance. That is not to say that we cannot be excited about a particularly fruitful trade, but we must keep in mind that a losing trade is not far off. Setting realistic goals is an essential part of keeping trading in perspective. Trading is a competitive business, and one can assume the person sitting on the other side of a trade is taking full advantage of technology. Getting market updates with smart phones allows us to monitor trades virtually anywhere. Even technology that today we take for granted, like high-speed internet connections, can greatly increase trading performance. Using technology to your advantage, and keeping current with available technological advances, can be fun and rewarding in trading. Saving money to fund a trading account can take a long time and much effort. It can be even more difficult (or impossible) the next time around. It is important to note that protecting your trading capital is not synonymous with not having any losing trades. All traders have losing trades; that is part of business. Protecting capital entails not taking any unnecessary risks and doing everything you can to preserve your trading business. Since many concepts carry prerequisite knowledge, it is important to remember that understanding the markets, and all of their intricacies, is an ongoing, lifelong process. Think of it as continuing education - traders need to remain focused on learning more each day. Hard research allows traders to learn the facts, like what the different economic reports mean. Focus and observation allow traders to gain instinct and learn the nuances; this is what helps traders understand how those economic reports affect the market they are trading. World politics, events, economies - even the weather - all have an impact on the markets. The market environment is dynamic. The more traders understand the past and current markets, the better prepared they will be to face the future. There are two reasons to stop trading: an ineffective trading plan, and an ineffective trader. An ineffective trading plan shows much greater losses than anticipated in historical testing. Markets may have changed, volatility within a certain trading instrument may have lessened, or the trading plan simply is not performing as well as expected. A trader who is not in peak condition for trading should consider a break to deal with any personal problems, be it health or stress or anything else that prohibits the trader from being effective. After any difficulties and challenges have been dealt with, the trader can resume. An ineffective trader is one who is unable to follow his or her trading plan. I mentioned that funding a trading account can be a long process. Before a trader begins using real cash, it is imperative that all of the money in the account be truly expendable. Traders must never allow themselves to think they are simply "borrowing" money from these other important obligations. One must be prepared to lose all the money allocated to a trading account. If it is not, the trader should keep saving until it is. It should go without saying that the money in a trading account should not be allocated for the kid's college tuition or paying the mortgage. Taking the time to develop a sound trading methodology is worth the effort. Traders who are not in a hurry to learn typically have an easier time sifting through all of the information available on the internet. Consider this: if you were to start a new career, more than likely you would need to study at a college or university for at least a year or two before you were qualified to even apply for a position in the new field. It may be tempting to believe in the "so easy it's like printing money" trading scams that are prevalent on the internet. But facts, not emotions or hope, should be the inspiration behind developing a trading plan. Expect that learning how to trade demands at least the same amount of time and factually driven research and study. A stop loss is a predetermined amount of risk that a trader is willing to accept with each trade. The stop loss can be either a dollar amount or percentage, but either way it limits the trader's exposure during a trade. Using a stop loss can take some of the emotion out of trading, since we know that we will only lose X amount on any given trade. Ignoring a stop loss, even if it leads to a winning trade, is bad practice. Exiting with a stop loss, and thereby having a losing trade, is still good trading if it falls within the trading plan's rules. While the preference is to exit all trades with a profit, it is not realistic. Using a protective stop loss helps ensure that our losses and our risk are limited. There are two reasons to stop trading: an ineffective trading plan, and an ineffective trader. An ineffective trading plan shows much greater losses than anticipated in historical testing. Markets may have changed, volatility within a certain trading instrument may have lessened, or the trading plan simply is not performing as well as expected. A trader who is not in peak condition for trading should consider a break to deal with any personal problems, be it health or stress or anything else that prohibits the trader from being effective. After any difficulties and challenges have been dealt with, the trader can resume. An ineffective trader is one who is unable to follow his or her trading plan. External songstress, poor habits and lack of physical activity can all contribute to this problem. One will benefit by remaining unemotional and businesslike. It might be time to reevaluate the trading plan and make a few changes, or to start over with a new trading plan. An unsuccessful trading plan is a problem that needs to be solved. It is not necessarily the end of the trading business.
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