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If you fail to plan, you are planning on failure

08/17/2011

Does an engineer design a new automobile without a plan? Does a contractor build a house without employing an architect’s design? Does a fortune 500 company have a strategic plan for the next XX years? That all sounds a little esoteric so let’s bring it a little closer to home.

Back when I was renovating apartments and houses, did I have a plan? Did I know how much I was going to spend? Did I know how much I was supposed to get when I was done? (I wasn’t always right, but more on that later) When driving from point A to point B, do people plan the trip? Look at a map? Know when they’re going to start driving? Plan for gas stops or sightseeing along the way?

The world revolves around careful planning. We don’t always reach our desired outcome. Sometimes we blow our goals out of the water and sometimes we fall short. But, we plan. I, for one, would rather “shoot for the moon and only make it to the stars” than not know where I’m aiming.

We set an alarm in the morning, eat lunch at lunch time, go to work when we’re supposed to and come home after a grueling 8 hours at the desk.

Maybe I should say, the real world revolves around planning.

So, why do so many people fail to plan out their trading? Is trading not real life? Do we lose track of time when we’re sitting at our desk? For those of us who don’t trade full time, do we just sit down and pull a few pips from the market when we have time?

Do we make money? Do we lose money? (the answer is probably yes – so this question is worthless without context)

Do we even know what our goals are? Here’s one goal, “I want to make a few million dollars.” That’s great, how are you going to get there? What’s ‘a few?’

“I don’t know.”

Well that makes sense.

That’s a reasonable goal though, right? I mean, if I’m going to max out my earning at $5,000 – $10,000 a month, I may as well go get a job at a big fancy corporation. I can make in that range a month from month one. Maybe your personal numbers are higher or lower, but the sentiment is the same. Otherwise we’re just wasting our time.

So, do YOU have a plan?

I recently attended the Money Show event in San Francisco. While sitting through one of Greg Michaelowski’s seminars, he asked the audience how many of us had a written trading business plan. Maybe 5% of the room raised their hand. (Ya I raised my hand, thanks for asking) The point is, if we don’t have a goal, how do we know when we get there, much less how to get there?

So how many of you have a trading plan?

Think of it a different way. I’m a pretty big fan of working out. I understand how to change things about myself physically. I know how to lose weight if I want to slim down; I know how to bulk up if I want to add muscle. I know that when I want to climb a 14,000+ ft mountain, I have to plan ahead a little. I can’t just start walking and hope I’ll get there (sure, under this plan I’ll probably reach the summit and even get back. But I’m way too old to just pull a 17 hr walk out of a hat. That’s tiring. I know, I’ve done it. It wasn’t fun. In trading, we call this drawdown.)

When I choose to pursue one of these above goals, I determine where I am, I write down where I want to be and when I want to get there. I know how to eat right.

But do I?

Well ya, usually. But the first step climbing a mountain isn’t the first step. That’s the culmination of a lot of prior planning steps. So, when I want to put on or take off 20 lbs, where do I start?

I start by looking at where I am. What is my current fitness level? What’s my weight? How far can I run? How much can I lift? Ok, I get all that figured out.

Then I plan where I want to be.

Then I write down how I intend to get there. That makes sense right?

So why do so few people do this with their trading? Honestly, I don’t know. Give me some feedback and let’s see if we can come up with a few reasons.

Next, I will discuss the difference between goal setting and planning. After that, I will share with you how I attack my trading business plan. These things are personal and depend a lot on an individual’s desires and skill level, but I think you’ll find the insight useful.

Happy trading,

Kosentrade

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2 Comments
  1. Great article (and not just because you included my name either).

    I am amazed but not surprised when I speak and I ask the question. What is your mission? How are you going to get there (what is your game plan)? Few traders take doing those two things seriously.

    So why don’t traders have a plan? I think some think that buying or selling is their plan. In other words, they say “my plan is the price is to move down” or “my plan is the price to to move up” I don’t think that is enough.

    One reason why they do not take it further, is they watch on the business channels traders get on there and give what I hope is a Readers Digest version of a trade. ” I like this stock because of some fundamental reason. I like that stock because of this”. When I watch the forex show Money in Motion, the trade of the day is sometimes “Buy this currency pair for this fundamental reason. The take profit is 300 pips away. The Stop Loss is 150 pips away”. Traders watch that and think that is how they should trade. That is not a plan. That is an idea.I do like when the technician comes on however and giives his technical Yea or Nay. That is getting there, but I wish it went even further.

    People tend to be more enamored with the story behind the move, i.e., the fundamental story. That makes “Selling is my plan” a plan that is acceptable. To me, that should be an idea behind a bias, but is not a plan that will define risk and outline the road map for the trade. A roadmap that has a number of stops on the way.

    So its the fundamentals Tim. People love to plan with a story.

  2. “So its the fundamentals Tim. People love to plan with a story.” >> I’m amazed how much more I know about fundamentals after I’ve had a few drinks.

    Tell ya what Greg, I’ll wait for the trade to develop then formulate a fundamental reason for why it panned out the way it did afterward. 🙂

    Or, if I’m in a trade, I’ll give a fundamental reason for why my original fundamental analysis was off. Regardless, I’ll blame “the market” for my losses.

    Agreed, in the long run, I believe fundamentals drive the market. But in the short run, all fundamentals do is move the market.

    We need a strategy based on technical entries and exits if we want to make money trading. If we don’t limit our risk all we’re doing is gambling. I hate gambling.

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