WHY A TRADING PLAN?

The most inclusive answer would be: to make money. A trading plan will
include trading strategies that you should have tested that give you the best
chance of winning, in other words, the high probability ones with a back
tested positive expectancy. Without a plan, traders are trading on whims
and could go long one day and short the next, given the same the market
conditions and scenarios. They have nothing to judge their trades on and
therefore may act differently one day from the next based on their bias.
This turns trading into a crapshoot, which as you may infer from the title
of this book we are hoping to avoid. With a proper plan you will have a
real reason to be in a trade and will reduce emotional and spur of the moment
decisions, as these types of trading decisions will not normally lead
to a positive bankroll. If all your decisions were made during nonmarket
hours with timing and execution being your main concern during market
hours, you will dramatically increase your chances of success. An example
of this would be the crude trade in the previous chapter. It was a spur of
the moment trade by John, with little thought process as he had no plan to
base his trade on. Meanwhile, when Harry made the trade it was because
it fit into his trading plan, and he was able to profit from it because it was
planned out.

By having a trading plan you will not be chasing the markets or making
trades due to a news flash or some other silly reason. You will also reduce
the number of trades made, which will save you a ton of money on commissions.
Plus, you will always know when to exit every trade, which is as
important as getting in. By not sticking to a plan, you can easily fall into the
trap of throwing hanging curve after hanging curve when losing in hopes of
recouping losses. A trading plan will keep you focused throughout the day
and hopefully limit your foolishness. Another reason for having a trading
plan is so you know just how much to risk and where you should set stops
to take a loss. If you have a maximum loss level and it gets hit, it shouldn’t
freak you out because you would have been prepared for it, however, if
you never set a maximum loss level, you could watch your whole account
disappear as you hope for a rebound.

The trading plan will give you a predetermined reason for every trade,
which in turn will lower the gambling aspect of your trading. Good traders
do not rely on luck. Yes, luck is great to have, just like when playing
poker, but like a good poker player, a good trader doesn’t rely on luck
in the long run, instead he has his skills, strategy, and rules that, when followed,
allow him to act and react to all conditions and come up on top.
And this is all made possible through successful planning, not by accident
or luck.