Removing The Beast From Within 

The 6 Steps to Working With a Trading Plan 

The Rational Investor 

Because trading revolves around money there is a natural human emotional response
surrounding the implications of either a loss or gain of that money. These fear and greed
emotions often make us humans act in what seems to be very illogical ways when looking back
in hindsight. Sadly, it is often only after-the-fact we see how foolish we were while these
emotions dominated our behavior. So, the key to success when trading for capital gains is to
remove emotion entirely from the process. The only realistic way to do that is to work with a
trading plan. Success all comes down to behavior and more importantly, consistently calm
behavior while everyone else around you is panicking.

In my over 30 years of
experience trading I have
learned that there are two
main reasons why most fail.
The first is using poor
trading setups. The second
is poor behavior by the
trader themselves. If you
are not achieving the
success you desire from
trading it probably comes
down to one of these two
issues. Only by
demonstrating consistent
behavior can we hope to be
able to address which of
these two problems it is. And only through using a plan can we track our performance from both
an empirical point of view (are we actually making any money) and from an emotional point of
view (are we acting in our best interests). Keep in mind, the market is nothing more than an
expression of our collective perception of value. Each and every one of us is ‘the public’ and if
we give into our natural instinct, we want to buy tops and sell bottoms. Without a plan that
specifically prevents this, we are almost unfairly (as human beings) setup for failure.

Now that we have decided to work within a plan, what are the steps involved in both building the
plan and implementing the plan?

1. Building The Plan

 The Plan itself should contain both strategic and tactical elements. From a strategic
perspective, It should reflect who you are, where it is you are going and what you expect
to achieve. From a tactical perspective, the plan should outline the capital you are
working with, the markets you are trading and appropriate risk thresholds. The Trading
Plan should outline your behavior (the what and the how) and your Setups define the
action (the when and the why) you are going to take.

2. Choosing Your Setups Within The Plan

Deciding what criteria ‘sets up’ a trade for you is a very personal experience. No two
people look at the market the same way. Some are attracted to price while others lean
on indicators. There is no ‘right’ way to trade. The only thing that matters is when you
see a certain set of conditions met you have at least a slightly better than 50% chance of
seeing your desired outcome (or what traders like to call their ‘edge’). Ideally, we would
like to see multiple reasons to take a trade and we would like to ensure our average
winner is larger than your average loser. Other than that, your setups can take any form
you chose. Some trade off of the perception of value (fundamental analysis), others use
charts (technical analysis) while others still use esoteric ideas like the location of planets
in our solar system. It doesn’t matter, what does matter, is there is a specific set of
conditions met and you have clearly identified entry, risk, and profit objectives on every
trade.

3. Plan Implementation
It is one thing to say you’re going to either buy or sell at a given level when certain
conditions are met, it is quite another to actually do it on a consistent basis. This counts
for both when you are in a trade and when you are not. Ironically, one of the hardest
things for new traders to do is leave a position on that is marginally profitable. The fear of
losing that small profit can often get someone to act out of the emotional response rather
than letting the trade work to its fruition. The key here is to record everything you do;
every action, emotional response, and profit or loss. In order to get better one must keep
precise records including both trade logs and journaling your personal feelings/emotions
through the entire trade process. Yes, it is a lot of work and sometimes it seems like a
major inconvenience but we are professionals and this is a profession. No one said
trading for a living wasn’t a lot of work. As you progress as a trader you will come to see
the value of this information. Some veterans keep their trading journals in fire proof
safes!

4. Commitment
Commit to this process for a predetermined number of trades. Far too often, new traders
will try a setup for a few trades and then not seeing the desired results will move on to a
new one. This process of endlessly searching for the ‘perfect setup’ can often be the
undoing of the new trader. Let me make this simple for you - there is no perfect setup, it
does not exist. Trust me, I have spend more than 30 years looking, it isn’t out there. The
key here is not to find the ‘perfect setup’ that works 100% of the time, but rather to set
 yourself up so that you aren’t looking to be ‘right’ 100% of the time. By building a plan
that expects (and even anticipates) failure, you are relieving yourself of a completely
unnatural (and unhealthy) burden many put on themselves. So with this in mind, I
suggest setups should produce desired results 66% of the time (or about ⅔). Yes, trades
will fail, but if we put together a number of trades that follow the same setup criteria
statistics should work out to our benefit over time. If we commit to say 20 trades before
we review the performance of our plan, it both forces us to work through setups that fail
(and hopefully learn about the failure through journaling) and gives our setup a chance
to prove its statistical relevance. Ironically, because of the chaotic (and what sometimes
seems very random) nature of our universe, even the best statistical models will go
through periods of anomalies.

5. Plan Review
Am I achieving my desired objective? If not, is it my setup or is it my behavior that is at
fault? If it is a question of a poor setup, we can always find new ones to use. However, if
it is a question of our personal behavior, then we must be able to ‘look in the mirror’ and
address those anomalies. This is where the aspiring trader must do a lot of soul
searching and there is no easy way around this problem.

6. Plan Adjustment
Adjusting setups used is relatively easy. Are you looking for (and finding) 3 unrelated
reasons for taking trades? Are you identifying realistic profit objectives and risk
thresholds? Are there macroeconomic events that may influence your setup’s
performance?
If however, it is a question of behavior modification, you must understand why you are
doing what you are doing. The only way to change bad behavior is to keep detailed
records of your actions and build supports within your plan to address these problems. If,
for example, one is tempted to put on a position ahead of a liquidity event and they
consistently see through their trade logs that taking a trade ahead of volatility isn’t
working then one solution might be to include a condition within the trading plan to ‘not
put on a new position heading into a liquidity event’. If one continues to put on positions
heading into liquidity events then clearly we can see the problem is behavioral. Let's face
reality here, if you are incapable of adjusting your behavior (and there is nowhere that
says you must be) then trading is not for you.

Summary
Trading is all about demonstrating best practices on a daily basis. It is about holding yourself
accountable for your actions and taking the necessary steps to correct those actions if your
results are not desirable. But it is also about setting yourself up for success. There are ways to
remove the anxiety we humans experience when it comes to making decisions about money
and that’s all about working with a plan. These 6 steps listed above should give you the basic
outline for building and working within a trading plan. As you can see from this list, this is an
ongoing process where your trading plan itself becomes a ‘living document’.

Trading can lead to dramatic rewards but it isn’t easy work. It is a profession and to do it
correctly you must demonstrate professionalism. In my opinion the ‘3 P’s’ sum up a trader's life
nicely and are a good way to end this educational piece - ​Patience, Persistence & Positive
Mental Attitude​. For those easily swayed by emotion or are unwilling to ‘look in the mirror’,
getting to the point of seeing desirable result from trading may be an arduous process. We are
all humans where many of us are either not capable of or simply don’t have the mental capital
(time or energy) to commit to such an endeavor. For them, I hope I have saved you a lot of time
with this very frank statement - trading isn’t for everyone. For those that can work within a plan
and hold their action to account, the rewards can be limitless.

January, 2017
Brian Beamish
aka The Rational Investor
http://www.therationalinvestor.co/
Twitter: @CRInvestor