Struggling to come up with a trading plan that makes you money? Are you losing money trading stocks, forex or futures? Use these three questions to get your trading back on track.
You have come up with a trading plan, or are working on building right now. The trading plan is your strategy for extracting profit from the market. It is well thought out, thoroughly tested, and may be based on your own unique trading methods or based ideas from other traders. No matter how your trading plan was devised, you obviously feel it should work. The concepts worked for someone else or you took the time to develop a trading plan which should theoretically be profitable. But what should you do when profitability alludes you?
When a trading plan fails to work, it is the result of one or two problems, and sometimes both:
- The problem is with the trading plan itself. For example, the creator of the plan failed to account for a market reality such as changes in volatility, commission and fees, slippage, or some other market factor.
- The problem is with the trader. This is a more common problem. Even given a profitable trading plan the trader fails to execute it properly due to lack of discipline, greed, not adhering to trading rules, or fearing the market and thus not taking entry signals or exiting trades too quickly.
When the actual trading plan is at fault, it can be an easy fix if more research is done or more knowledge is acquired. The trader being the problem is more complex…usually because the trader continually blames the trading plan and does not look internally. Traders also like to blame others, such as their broker or other traders, when they are losing money. This deflects personal responsibility, and personal responsibility is a key requirement in becoming a successful trader. If we don’t make ourselves profitable, no one else will.
If you are losing money trading, no matter what your issues is, run through the following three questions:
- Clarify your objectives so you find/create a trading plan most suited to your needs.
- Take a personal inventory your personal risk/risk tolerance.
- See if the plan is likely to succeed (before you waste a bunch of money) based on the tendencies you know you have.
These three questions force us to analyze the viability of our trading plan, but also make us look at our goals and psychology as well. When we align our trading plan with our personality we are more likely to have success. For example, if you don’t like feeling under pressure or being forced to make rapid decisions, trying to day trade is at odds with your personality. This will make it more difficult to become successful.
It is time to get honest with yourself and admit your faults, struggles, tendencies and weak areas so that you can plan FOR them. When we don’t accept our short comings they will always cause problems. But if we become aware of them and own up to our problems, then we can hatch a plan for accommodating these problems. In this way, our trading problems are neutralized.
Losing Money Trading? Ask yourself these three questions.
These questions can actually be employed for any situation, not just trading. These questions focus us, and make sure we are constructing a proper plan of action whether it be in relationships, business or negotiation. Write down your answers, and any thoughts you have related to your trading. The more thorough you are the clearer you will be on what you need to change to be profitable.
Running through these questions when you are starting out trading, or if you are struggling. It is also a good habit to ask ourselves these questions anytime we have a major life change that could affect our trading or our goals, or any time there is a major change in the market (such as a long-term trend change, volatility change or we notice a strategy not working as well). Doing so may help us avoid problems before they even start.
1. What outcome do I want to achieve?
This is a more complex question than most people realize. Do not say “Make more money” or “Be able to quit my job to trade stocks.” These are vague and mean nothing. You must get precise in what you want to achieve. The results must also be tangible and measurable–“get rich” is not measurable. We need to define what “rich” is and how we will get there based on our current means. For example, if we have $5,000 in trading capital, but eventually want to make $10,000 per month from trading, what will it take to get there? Great day traders make 10% or more on their capital each month, while great swing trades make 5% or more per month. Based on those numbers, and growing the account over time, what are your goals for the next month? For the next year? These shorter-term goals will keep you on track for the longer-term goal.
You must consider the short-term and long-term, and how the two need to work together for the same ultimate goal. For instance, if your goal is simple to make money as quickly as possible you will likely try for home run trades, usually risking too much on each trade. While you may get lucky and have some short-term success, over the long-term you will lose everything you have with such reckless action.
Take a phrase like “I want to get rich” and widdle it down to a specific outcome which is measurable and achievable. What do you need to do each month to achieve this goal? What do you need to do each day? And finally, what do you need to do on each trade?
Write all your thoughts and considerations down. Once you have a clear description of what you need to do every trade (which allows you to meet your goals), put it next to your computer for easy reference. Your final question related to outcome is: Does my trading plan get me to the outcome I want? If it does, proceed to the next question. If the trading plan falls short, go back and rework the trading plan so it is in line with your desired outcome. Keep in mind we need to be realistic. Turning a small account into millions of dollars isn’t going happen quickly. It takes years. Make sure your goals are realistic.
2. What are the consequences of my plan?
You have an outcome you want to achieve, and everything looks great on paper. Yet, most of us like to indulge our fantasies…especially when it comes to trading. We assume we are smarter than others, and our sheer brilliance will make us money. Wrong. Avoid getting lured into the fantasy trap by writing down everything that could go wrong with your plan. Be honest and specifically critique what could blow your plan to bits. Here you will want to consider what would happen if the market trends for a long period of time, or what if it moves sideways? What if the price moves lower rapidly, or higher, for an extended period of time? What if there is no discernible trend or range, and the market seems to be moving randomly? What if price movement dramatically increases, or price movement drops to almost nothing? What if there were a increase or decrease in commissions or trading fees?
Consider how all these things could affect your trading. Does your trading plan accommodate for such changes? Does your plan keep you from losing when market conditions aren’t ideal for your strategy? Does your trading plan capitalize when times are good? What market condition causes your plan to lose money…and if that condition were present for several months in a row, how much of your capital would you lose? Would your trading plan protect you from losing too much money?
After you have your list, go over it and ask yourself once again if your goals are still achievable? Given the realities of the market can your plan make money? If your plan meets your desired outcome and you can handle the consequences then proceed to the next question. If you can’t handle the consequences your plan may dish out, then re-work your plan till it is within your personal risk tolerance given the harsh reality of the market.
In this step also consider other consequences outside of the markets. For instance, will the time required to execute the plan take away from family time or beers with the buddies? Can you deal with those consequences? Can your family and friends deal with it? We don’t live in a bubble; our actions affect others, and their actions affect us. If you have a career, can you squeeze in your trading activities without negatively affecting your other work? What if you lose your trading capital? Will that negatively affect your family or lifestyle? Consider the consequences of what you are doing and the effect it will have on yourself and others. Make sure you can handle such consequences.
If you haven’t fully accepted the consequences, they will come back to bite you. If you have accepted the consequences you will be more at peace with your trading and ironically this will improve the chances of profitability.
3. Is my trading plan consistent with who I am?
This is by far the most important question, as it is where most people fail to account for their individuality. Your plan may look good on paper; it meets your objectives, you can handle the consequences/losses which may result from it, but if it is inconsistent with who you are then you are unlikely to find success. If you do not like stress and constantly having to watch the market, no matter how much you want to be a day trader it is not going to work. Your day trading plan will likely fail because it is at odds with who are. Your personality will continue to sabotage you despite your best intentions. Alternatively, someone who can’t sleep while they have an open position is unlikely to achieve long-term success as a swing trader. Open a demo account and try out day trading, swing trading and investing. Research what it takes to be successful in each of these fields. What character traits do people in these fields typically have? What style of trading most accurately aligns with your goals and personality? Depending on your personality, how much time you have and your goals, you may opt to do one, two or all three styles of trading.
Look at your plan and and then take inventory of you who you are. Do the plan and you mesh? If not, re-work the plan. If you feel you will constantly need to fight internal urges then your plan will likely fail. If you know you have certain negative tendencies, you may need to set physical barriers to keep you from your tendencies, such as turning off monitors after entries, stop losses and profit targets have been set. This will help you to avoid exiting positions too early if this is one of your tendencies. It may mean having to leave the house or trading office during lunch if you continually lose money during the quite afternoon periods. Know yourself, and then build your plan so it neutralizes your negative tendencies.
If you and your plan do mesh, then proceed with executing your plan. If the plan has passed through these questions in an honest fashion, you will be well on your way to achieving your objective.
How to Stop Losing Money – Summary
If you are struggling, run your decisions and trading plan through these three questions. The questions, if fully and honestly answered, will clarify your objectives, make you aware of potential risks and ultimately determine if the plan is right for who you are. Trading is more than just plunking a plan on paper or hitting buy and sell buttons, you must make sure your plan aligns with your life and your personality. To get yourself on the profitable track, be as thorough with these questions as possible. Dig deep. The more we put into the exercise the more we get out.
These three questions, although I have altered them slightly, are from a non-finance book that I highly recommend: Accepting the Radical: You Can Not be Fixed by Ronna Smithrim and Christopher Oliphant. In the book these questions are used to determine the proper personal course of action when making decisions in everyday life.
By Cory Mitchell, CMT
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