Many traders begin their trading life by studying books, learning online and perhaps enrolling in a course or two.  They open a demo account and get a feel for their trading platform, begin trading with their demo account and after some time become confident enough to deposit funds into a live account and trade for real.  Many traders feel this is enough and they eagerly begin their new career and laptop lifestyle.

The reality is that trading has many arms or skills needed and to be consistently profitable you need to understand all of them.  The psychology and emotion of trading are perhaps the two biggest factors for a day trader.  Without an understanding of your own psychology and how you handle both your losses and your wins, it’s going to be a tough road.  Emotions equally play into this and the ability to understand your emotions is key.  These are complex subjects and can be discussed for hours.  Obviously, the art of trading itself is hugely important, technical analysis is my preferred style so learning chart patterns and how to use various indicators is something that takes time and comes with experience.

The part that many traders think is not so important and often decide to skip is putting together a trade plan and keeping a trading journal.  I strongly disagree with this and think that it’s as important as any other part of trading and without it, you stand a bigger chance of failing as a trader. 

A trading plan is as important as a business plan for any other business.  If you were to setup a new business as a retailer, you would research what products you are going to sell, how you are going to sell them, what your costs are, what your profit margins are, how you will ship your products, how will you market your new business and finally, how much you will sell each product for.  Without considering these basics, it would be unlikely that your new business will be successful. The idea that you would buy your products and add them to your new online shop without knowing at what price you need to sell them is obviously crazy.

A trading plan is as important to a day trader.  Knowing how you’ll trade, technical analysis or fundamentals, scalping or swing trading, what setups are you looking for, how will you decide to enter a trade, how will you know when to exit a trade, these are all part of your day trading business plan. You must set the rules of how you will trade in the same way as you would for any other business.  The second part is to then make sure you stick to your plan!  This is where discipline plays a huge part.

A trade plan doesn’t have to be a long, complicated and boring list of criteria.  In fact, the simpler the better as it will be easier to stick to, but it must have enough meat to guide you. Setting your rules and principles can be a nice way to distinguish between what you can and can’t do, as well as what can be adapted.  For example, the following may be considered good rules:

1. Always place a stop when entering a trade.
2. Never move your stop once in the trade increasing losses.
3. Never risk more than 1% of your account per trade.

Each of these rules will help you limit your losses, therefore when on a losing streak, and you will have losing streaks, your capital is protected, and you will be able to weather the storm.

Rules are in place and should never be broken, principles on the other hand are more of a guide but can be adapted.  As flexibility is key to trade in a disciplined was in a volatile market. For example, one of my principles is, “Don’t hold a trade over the weekend.” However, if I am in a trade Friday afternoon, the technical setup is still valid, I am perhaps in some profit, but price is telling me I could take some more by holding, I may well hold over the weekend.

To illustrate the importance of a trade plan but the fact that it can be simple, below is the basis of my personal trade plan:

Rules:

1. Do NOT move my stop unless to close a loss earlier
2. Do NOT chase a trade
3. 3 losing trades or 100 pips per day stops me trading for the day
4. 3 losing days in a row stops me for the week
6. If I ever lose 50% of my account I will stop trading

Principles:

1. Don’t hold trades over the weekend
2. Don’t trade on NFP day
3. I will cross each day in my diary as a win or loss day so I can easily monitor our profitable days

Rules for entering a trade - I will only enter a trade when 3 out of 5, of the following are met:

1. Trendlines support the trade
2. Candles/Formations tell us the setup is valid with confirmation
3. Fib levels are touched
4. Stochastics are turning in the direction relevant for the trade
5. Moving averages indicate the direction is valid

Trade Size Rules:

1. I will trade 1% of the account size per trade
2. I will take a minimum 1:1.5 risk/reward size
3. My pip target is 250 pips per week

This is a simple “business plan” that I will look at each time I am to enter a trade.  I will make sure I’m not breaking any of my rules and that my principles are being upheld. By making myself accountable to my trading plan it limits the emotional responses I may have under various trading circumstances and keeps me clear and focused for each individual trade.

Anything you can do to minimise trading emotionally or spontaneously will be a positive thing as it’s an easy trap to fall into, whether you are winning or losing. The emotion of fear and greed can have you lose your common sense and logical thought pattern.