Trade Your Plan - Be aware and you're half way there

My agenda is to stop my (new) students from losing money but generally their agenda is to make huge profits (and quickly). You can't be profitable if you continue to lose and we all learn to do that early in our market journey. It is critical that traders learn what to do to profit.

The psychological state of traders is an interesting study. When they are on trades going their way they are upbeat, positive and often euphoric - which they should NOT be. Trading is about calm detachment and executing flawlessly first time every time based on what your written proven profitable plan says to do given every market circumstance. Traders in a 'positive' mindset make many trading mistakes based on greed:
• they get loose with their trading rules and do what they like or feel rather than following their plan (that was the reason their trading was going so well in the first place!). They feel invincible and as if they are brilliant traders that can make huge profits in a very short period of time. The consequences: they take trades that they shouldn't or they put on positions that are bigger than their position sizing rules allow. In short, they over trade and this inevitably brings large drawdowns.
• they fade their stop loss exits. They remove them from the market (if in fact they were placed) or they move them AWAY from the direction of the trade. Both are cardinal sins of trading in my humble opinion. The consequences: they feel overconfident and bullet-proof and so they let small losses turn into large losses. They think things are going so well and they are such fabulous traders that the losing positions just HAVE to turn around. Again, they lose sight of the fact that it is NOT them, it is their PLAN that has got the account looking so good. In essence, they don't follow their plan.

Traders in a 'negative' mindset have usually got there by allowing themselves to be adversely affected by a run of losing trades or by sweating on a drawdown in their account. If they have done the work to back test, forward test and paper trade they should be well aware of how their plan works in a range of market conditions. They should know what to expect and only get interested if system metrics are outside 'normal' range. Traders in a 'negative' mindset make many mistakes based on fear. They are scared (a bit like a rabbit in the headlights) because they have allowed themselves to become emotionally involved and beaten up.
• they ignore their position sizing rules and put on smaller positions. They think this trade 'appears' too risky or that their account is running out of money. And.... of course, the trades go their way and make a relatively small amount - perhaps not digging the account out of the drawdown.
• they ignore their entry rules and fail to take trades at all or at the time that their plan signals. Trades have not been going so well and/or they have had a few stop-out trades so they think that they will wait and see. And.... of course, they miss good trades again not digging the account out of the drawdown.
• they ignore their exit rules and take profits too early. They think that everything is against them. There is some profit there. I am not giving this back. I think I will grab it quickly because a profit is a profit. And.... of course, they kill big winners.

The consequences of these actions is an even worse mental state. In essence, they don't follow their plan. The problem is that they 'think'!!! The thinking is done in the development stage of creating the trading plan - not during a campaign. All the thinking is in the plan if only they would follow it.

The only way out of a drawdown is time. If the plan is profitable (and not broken) the profitable trades will come IF the plan is followed. The consequences of not following the plan is delayed recovery or ruin.

Trading Nirvana is a gently rising equity curve with few relatively small drawdowns. The only way to get this (as far as I know) is to firstly have an excellent plan (ME>3). Next is to develop the ability to consistently and accurately trade that plan. Once you have these things under control there are further steps that can be taken to smooth your account curve. One is to have different plans for different market conditions and another is to have different markets that are as uncorrelated as possible. There are also things that can be done at the 'portfolio' level - but portfolio management is another story.

Be aware and you're half way there.

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The Cycle Based Trading Systems (CBTS) course was held first in 2013. It was desinged as a bridging course to connect Advanced Cyclers who understood cyclic theory and who could effectively do cyclic analysis with $$profits$$ from the markets. The feedback from participants has encouraged me to re-offer it because they said that it really helped them to get a plan together, get it tested and get the confidence to move to real time real money.

Cycle Based Trading Systems (CBTS) has since been transformed into Trading Advanced Cycles.