This is the continuing story of our two imaginary traders, Peter and Paul.
Peter is a professional trader, Paul is not. Peter has a tested, proven, written trading plan that he follows each time he enters a trade, Paul does not.
Peter and Paul have had vastly different Stock trading experiences – Peter has just made another substantial profit – this time from the Bear market, Paul has lost heavily.
A chance meeting with Peter’s group of friends one day at lunch launches Paul on a learning curve that will see him become a good trader, but not without some hard lessons along the way.
Today Peter shares his trading plan and the importance of having a trading plan with Paul.
“Today we will work on your Trading Plan,” Peter told Paul as they sat down for the start of their next weekly mentoring meeting.
Peter handed Paul a copy of Robert Miner’s book, stock trader Dynamic Trading, and said, “Here, read this section of this wonderful trading book.” Paul read to himself quietly as Peter poured them both a cup of coffee.
“The purpose of Technical Analysis is not to be able to accurately identify every market position, all of the time. While this may be the daydream of many analysts and most amateur traders, it is an impossibility.
“Every method of technical analysis has it’s limitations and at times will provide contradictory information. Unless the analyst, trader or investor is willing to accept that his or her analysis will from time to time not provide a confident opinion of market position, he or she is doomed to failure.
“The objective of technical analysis is to identify those market conditions and the specific trading strategies that have a high probability of success.
“If there is a key concept associated with trading and investing, it must be probability. All consistently profitable traders and investors know that every trading and investing decision only has a probability of success, never a certainty.
“Losses are inevitable and are just as much a part of successful trading as profits. If a trader has a successful trading plan, he or she should have no more emotional response to a loss than to a win. Each will be inevitable.
“While it may be difficult to maintain a completely non-emotional relationship to trading and investing, an understanding that trading is a Business of probabilities will go a long way towards developing a stable attitude towards the Business.
“All successful traders have a defined, written trading plan. The trading plan can take many forms. At the very least, it will provide the minimum guidelines that must be satisfied before a trade will be considered. It may be as complex as a long set of very restrictive rules that must be satisfied before a trade can be considered.
“Each has it’s strengths and weaknesses. Neither method, whether rules or guidelines, guarantees success, but the lack of either will ensure failure.
“Why have a trading plan and not follow it? Each guideline and rule must be included with reason and purpose. All successful traders and investors consistently follow their trading plan and they know that if they violate their trading plan it will always be costly in the long run.