Trading is simple, but difficult due to the uncertain, uncontrollable, ever-changing nature of markets. It’s normal to have emotional reactions to having to make many decisions in an everchanging environment where our money and self-worth are on the line. We can talk endlessly about the phycological side of trading and of dealing with trader’s bad habits, but all it does is make you think there is something wrong with you. Instead, there is something we can do that handles many of these so-called bad habits in one swoop. We can structure a trading plan where we control the things that we can control and make many of these decisions ahead of time so that we are not doing it on the fly while under pressure. I walk through some of this in the video.
Know your method and design precise rules for and know ahead of time:
- Entry: Know what gets you in
- Initial stop: know where your stop goes
- Money management: Know your position size and trade management after in trade
- Exit: know what gets you out
Now you have limited your decisions down. You can choose to follow the plan or not. If over a period of trades you find that the plan sucks, re-work parts of it and do it all over again for another period of trades. After you have developed the discipline of following your plans, you can have flexibility within your structure.
There is a balance we must find between being too loose and being too rigid. Too loose, and we are all over the place and can’t get any consistent results to evaluate. Too ridged, and we risk not being able to adapt to markets. No plan you can design will be perfect, they all will have possibility and limitation, but I have found in my own trading that having a mediocre plan is better than having no plan. Mostly, we need to match up to our particular method with the money management plan that works well with that method and then follow the plan. You may have some resistance to all of this structure, but take it one step at a time as your ready.
In Foundations of Trading Part 1, I stated the number one rule was the preservation of capital. We have no control over what markets do but we can take control of our money management and risk. In this video, I lay out some basic guidelines for working out maximum stop size with ATR (average true range) and designing our risk management plans. The image below shows an older example of a maximum stop size for AUD and ES. In the video, I show how to get the current maximum stops. You can use my simple guidelines for ideas in creating your own risk management plan and then ingrain it to the point where it’s not a discipline but a normal part of trading life.
Each trader has their own brand of crazy and we need to see it all cause we can’t improve what we don’t see. The main purpose of a trading journal is to become more conscious of ourselves, markets and of us trading markets. There are many ways to structure it but keep it as simple as possible, personal to your needs and let it evolve as you do. You mainly want to use the trading journal to have a place to be accountable and make observations of your trading. What you find will help you to create any needed disciplines or make any adjustments in what or how you trade.
In the end, we are working towards mastery of our trading craft which requires working towards mastery of ourselves. A trade journal is a tool that helps us take responsibility for everything we think, feel and do when it comes to trading. If you have some resistance to it, just do what you can and ease your way into it. The writing by itself will begin to loosen some things up. In the video, I will give some ideas about how to structure your journal.
We make a trade plan, execute, then evaluate to see what we can learn about price and ourselves. Making and documenting a trade plan helps us to clarify what it is were doing and thinking at the time of a trade, it makes us more accountable. A trade plan can also serve the purpose of holding us steady after we are in the trade and subject to more emotional reaction.
A trade plan is a personal thing that needs to be adapted to you and your trading. Its best to keep it simple. My trade plan just asks a few simple questions and then I take a snapshot of the chart.
- Why am I entering?
- Why am I placing my stop there?
- Why am I moving my stop?
- Why am I exiting?
Its a simple question that asks why are you doing what you are doing? Don’t just be technical about this, also answer the questions as honestly as you can. If you entered a market cause you were impulsive or because the moon was blue or whatever.. write that down. If you are placing your stop real close cause you are scared of risk, write that down. If you jump out early cause you cant take take it anymore write that down. Don’t be embarrassed you have plenty of company including me now and then but you can be one of the few who actually takes an honest look and learns. Here is a recent trade plan of mine that did not get filled.
The Andrews Median Line is a simple tool that can be applied any instrument in any time frame. It beautifully describes and projects the process of a swing cycle. The Median Line simply bisects a price swing using the relationship from any 3 alternating pivots and then projects price back to its median to complete the swing cycle. If there are two extremes, (opposites) there must also be a center. I refer to Median Line tools cause there are a few basic types of Median line sets along with a some other lines tools. With a thorough understanding of these tools and swing structure we can use them very purposefully fro particular situations.
Median Line Tools
- Standard Median Line set
- Pendulum Median Line set
- Modified Schiff Median Line set
- Reverse Median Line set
- MPL – Multi-Pivot-Line
- Action Reaction Lines
- Sliding Parallel
This is the first in a series of foundational lessons on the principles of trading. These foundational lessons are relevant to any instrument, time frame or methods that you use.
- Preservation of Capital
- Market Structure
- Andrews Median Line Tools
- Trade planning
We start with money management. Because if you blow through your money you won’t last long as a trader. Money management starts with self-discipline, which is the first thing every trader should begin to foster. Preservation of capital is paramount. If you’re not currently profitable, cut your trading size down; you have to earn the right to size. Always use hard stops, which means, put in a stop order at the same time that you place your entry order. Know your maximum risk per trade, and stick to it. My risk management is 1.6% of my account per trade.
We will talk about Market Structure in the next part of this series.