By: Omar Eltoukhy
With 2014 behind you, it is time to turn the page and restart the results and efforts in a new year.
But, as Einstein so famously remarked about the definition of insanity coming from doing the same thing and expecting different results, most traders can think of at least a few things they wouldn’t like to repeat in 2015.
I hope my New Year’s planning guide will at least help you get organized and focus in on the parts of your trading that need work, and those that don’t need as much attention. By squaring things away NOW instead of doing it after you are in the heat of the moment trading, you will likely have more confidence and better strategy equipping you to better deal with the markets.
Paramount to growth is education, and trading requires many different skills. Of course, no one can be expected to know everything, but the longer you engage in this business, the more likely you are to pick up on a variety of different approaches, methods, techniques and skills. I like to make sure I start the year with a list that has 3 entries to help me move forward in the educational sense:
1) What You Already Know: Make a list of the skills you already have. For example, are you really great at identifying trendlines? Maybe you are exceptional at fibonacci. Every trader I have met usually excels in a couple of different aspects of trading. This is not a list of your qualities, but your knowledge about the “nuts and bolts” of trading. This way you can clearly recognize what your strengths are in technical analysis and fundamentals. Although you will need to continue to practice these skills, you should not spend the majority of your “learning time” trying to know more about these because you have two other sections to devote much more time to.
2) What You Don’t Know: Leave this blank to start the year. Obviously, you don’t know what is going to go here, otherwise you would be writing it in the next section. Every single year I have traded, I have come upon something new, that I never expected to find out, or learn at some point during the trading season. This could be a news event you had never heard about, maybe a correlation you didn’t know. As you make brand new discoveries in various facets of trading, come back to this list and start filling things in. It will give you great research topics for the 3rd section later.
3) What You Know You Don’t Know: There are always things that might be fascinating to you, but you haven’t learned much or anything about them. By writing them down and prioritizing them, you will have something to focus on during the downtime or time you put aside for learning. Heard about harmonics last year, but thought that only referred to music? Write it down. Been meaning to look up some information on Elliot Wave, or maybe Market Auction Theory?? Write that down. By keeping focused on topics you know exist, but haven’t actually looked into, you will be more motivated to make sure that the end of the year comes and you can possibly put some of the topics into the first category.
Trading Routine or the “DON’T BLOW IT” Plan:
Particularly when we are first starting out, we learn the meaning of “hard knocks” over and over again.
There are a lot of pitfalls in trading.
Some of them seem innocuous at first, but then come back and bite us in the behind later.
Like the hubris of doubling an account quickly by taking risks we didn’t even realize we were taking, only to have 90% of it vaporized in one day of revenge trading after the first day of the week didn’t go in your favor. It is perfectly normal to make those mistakes at least once, and very normal for them to happen a couple times. But the more they happen, the more you are to blame because if it is something you have control over that can be fixed with a “rule”, then it’s really a matter of you deciding whether or not to “blow it” after the first couple times it happened.
Whether this is trading on a Friday, or making sure you don’t “double down” and double the risk % after taking a loss, there are lots of areas for improvement for lots of us if we just don’t give into our emotions like anger, and bravado. That’s why I think it’s best to have them out in front of you before you even start the year. Recognizing the weaknesses within ourselves is good, and denying them is dangerous.
WE ALL are HUMAN. But the difference between those who are prudent and keep the equity curve in the right direction and those that see a roller coaster that is generally (and sometimes STEEPLY moving down) comes down much of the time to making sure you know what not to do, making a rule, and sticking to it. Here’s how I do for the beginning of the year.
1) Areas of Weakness/Mistakes: I look back on the previous year(s) and write down all the major “whoppers” of mistakes I made and try to get to the root of them. Did I trade too much during XXX situation?? Did I do it because I was XXXX?? Knowing your emotional reactions to certain stimuli like X number of losses or X% of loss can help you plan for the future. It could be something like “I took a trade on NFP because I thought I could and I lost 10%”. Or maybe, “When I went down 5% in the first day of the week, I decided to take lots of trades afterwards and ended up down 15% for the week”. These might take a little time to all come out of memory, but I can almost bet that most of you can think of one “big one” (or three) right off the top of your head from 2014. The memories that make us “wake up”. Write those down, and try to dig a little deeper so you can find the general “trigger” of what really makes you act a certain way that is detrimental to your own trading.
2) Rule Creation: Once you have identified your possible “trouble spots”, then you need to create rules that protect your trading business from your own monkey business. Make rules that are simple to understand, relatively easy to follow, and you can commit to. This will create a “bright line” that you know you shouldn’t cross. And I caution against making the rules too situation-specific, because then we try and twist them a bit to fall back into the habit.
3) Rule Enforcement: Once you have the rules, then you must decide how to punish yourself if you mess up. That can be trading suspension for a period like a week. Or maybe you can’t trade certain instruments, or maybe you won’t allow yourself to eat ice cream for a month if you break a rule. Choose something that you will likely enforce on yourself, that will cause a little discomfort, up to mild pain depending on how tough you are on yourself. Don’t go overboard and make the “addict promises” like “If I trade a Friday and break a rule, I will never trade again”. Don’t be extreme. These are likely to work as reinforcement only if they are within moderation. I also suggest giving yourself a quarterly report card and do some self-analysis on how you did on following your rules. I can almost guarantee you the quarters you follow those rules will be your most profitable.
Finally, the part of the plan that is the toughest to do, and something that no one except Bernie Madoff could actually pull off…………the consistent hitting of trading goals. Remember, benchmarks are just goals, NOT requirements. Too often, new traders obsess about “What can I make on average per month” and not enough about the actual skills in trading. Don’t make this mistake. There are many variables that will equate to your results. One of the biggest is the markets themselves which despite what you think, you have ZERO control over. So, keep your goals reasonable, and don’t beat yourself up if they don’t get reached if you followed your rules. Trading is a learning adventure all the time and we should always strive to get better.
Write down monthly and quarterly goals in % terms, as this is the easiest way to do it. Pips are great, but really don’t tell you too much about how much money you actually made. From week to week, make a “target number” of trades you would like to take and try and stick to it. Quantify your:
1) Max open equity risk: How much of your equity between all trades open you could risk at one time in % terms. This might sound obvious until you get into a situation where lots of great trades pop up at the same time. You take them all without thinking about it and before you know it, you have really risked 40% of your account across many trades. Understanding what you should risk beforehand will keep your eye on a very important number if that situation arises.
2) Max drawdown per week/month. Don’t trade once this is exceeded
3) Max gains % per week/month. In my experience, I tend to lose the most after the biggest wins. There are several factors in that, but it is quite common. Make sure you protect your gains at some point by suspending activities once you exceed a certain point.
4) Which news items you will not have trades open before/during: By knowing which news items you want to avoid ahead of time, you will not be as tempted if a trade pops up before one of these. I choose my “big 3” of FOMC, NFP and US GDP. Any of those 3 are coming up, I will be out of the market hours before they drop.
All in all, this is not an exhaustive plan, but a good place to start. If you have had great results last year, wonderful!! This plan will help you stay on the right track. If you didn’t have good results, this plan should help you get a handle on some areas to work on. Overall, we are all in control of our own destinies. More than the market, more than the system, the number one player in your game of trading is YOU. Take responsibility for your actions, plan your future successes, and then follow through. This is a formula to bring you to where you want to be. Don’t give up and stick to the plan. I wish everyone the very best of success in 2015!!!!!
Plan the Trade, Trade the Plan in 2015