A trading plan is a written out document that lays out exactly how we will trade. Most new traders don’t bother writing a plan down. Instead, they have a bunch of strategies in their head and then try to apply whatever one fits a situation. Usually, this doesn’t work out so well because with so many strategies floating around in our heads we are likely to always find trades! Yet just because we can find trades doesn’t mean those are high-quality opportunities.
In How to Make a Trading Plan I laid out the basic trading plan. If you really want to get good though, you need to go beyond that basic template and include some checks and balances. These are things that will keep you on track and sticking to your trading plan (this assumes you have one, of course).
Trade Log + Trading Plan = More Discipline
The first thing you should do is create a trade log. Quite possibly your trading platform keeps a trade log for you, but I also keep my own. This way I can track all sorts of stats that my broker doesn’t track or record.
In your trading plan, specify that you must fill out the trade log PRIOR to opening a trade (this applies to swing trading or investing only, not day trading).
The trade log includes your anticipated entry, stop loss, and target. It must also reference the strategy the trade is based on, and whether the trade meets all the strategy/trading plan criteria!
Being forced to answer that before the trade is placed forces us to really examine if that trade fits our trading plan. If we can’t reference a strategy that is IN our trading plan, or the trade doesn’t meet all our trade criteria, then we can’t take the trade. This simply method forces us to comply with our trading plan. If we take a trade that doesn’t align with a strategy in our plan, we are forced to put down an awkward “?” or “no” in that column which will stare us in the face for a long time.
If I find a trade while going through my screeners in the evening, I fill out the trade log before placing the order. Being forced to answer all the questions about the trade forces me to make sure this is a really good trade. Our goal as traders is not to just take every trade we see, but to pick the best ones. The best ones are the ones that match up to a strategy we have tested, and where all the criteria in our plan makes sure we are only taking the highest quality trades.
If you notice you make certain errors quite regularly, put a column in your trade log devoted to that exact thing. Make your trade log (which you start filling out before the trade) hold you accountable. For instance, if you notice that a lot of times you only see trades in hindsight and then jump into a trade late, you could put in a column in your trading log that asks “Entering on Time?”. This will force you to examine whether the opportunity has already passed you by, or if the opportunity is just starting.
Start using your trade log as a tool for sticking to your trading plan. The two combined are a powerful force for maintaining discipline.
By Cory Mitchell, CMT