From Philipp Pfitzenmaier at Trade with Precision:
As 2015 is coming to an end rather quickly (you already have finished Christmas shopping, haven’t you?!) Pretty soon people will start making the next round of New Year’s resolutions. And while increasing one’s physical activity level and losing some of that excess weight is usually high on most people’s list, we as traders should be doing the same. It is worth contemplating some trading resolutions of our own; here are some suggestions:
- Establish a personal limit system with circuit breakers
Trading can be a very emotional experience. While some traders look for the thrill of the markets, unfortunately we as traders are usually not at our peak performance once we get emotionally involved. Having several losing trades in a row can quickly trigger that “revenge” mode, where it’s you against Mr. Market and you want to make all your losses back in the next single trade and then some. More often than not that is the point in time where you want to step back, take a deep breath and review what you are doing. Think about establishing your personal limit system with built-in circuit breakers with rules such as the following as an example:
- “I will stop trading for the day if my account is down ‘x’% on that day(week/month)”
- “I will stop trading if I have ‘y’ losing trades for the day.”
- “I will review my trading (actual vs. plan) if my account is down ‘x’% per month.”
These rules will be personal as everybody’s pain level and trigger will be different. Ask yourself this question: which events really push you over the emotional edge and then establish your limit system and circuit breakers around them.
- Trading Journal
To gain maximum benefit from all trades, winners and losers as well from our mistakes it is of vital importance to keep a proper trading journal. With the start of the new year this might be the perfect opportunity to finally start that trading journal you have been reading about so much, right? To get the most out of your journal you would probably want to include as many high detail screenshots and comments that will allow you to retrace what was your reasoning when you placed that order in the first place. You want to take those screenshots at the very same time you raise that order to avoid any hindsight bias. After the position is closed, you should take another screenshot showing the outcome of the trade which then completes the picture for your review.
- Trading Plan
Of course both your personal limit system and the trading journal should all be covered in your trade plan. If you don’t have one yet, then this should be another one of your New Year’s resolutions. A trade plan is similar to a business plan for a trading business and would include the following:
- Describe your exact rules for finding trading opportunities.
- How do you enter new positions?
- At which price levels and why?
- Where are your exits – both profit and stop loss scenarios?
- What are your rules for determining the position size for your trades?
- How will you document your trades and which rules will make sure that you stay emotionally “in the zone”?
No matter your approach to trading – thinking about and implementing these steps could assist you with making your trading results more consistent and repeatable in 2016.
My best wishes to all of you for a peaceful and joyful Christmas/holiday season and a prosperous and successful trading year for 2016.