In our daily routines, we often find ourselves performing tasks reflexively and spontaneously. Take driving, for example - We don't consciously ponder each turn – it just happens automatically. However, this level of automaticity wasn't always the case. When we first learned to drive, every move was a deliberate, planned action. The same principle applies to sports and exercise. Initially, each move required conscious effort, but with practice, actions became second nature.
Interestingly, despite having learned various skills throughout their lives, novice traders often fall into the trap of impulsive trading. They neglect careful planning and fail to adhere to a well-defined trading plan, which is a crucial component for long-term profitability and success in the markets.
Starting out in trading is difficult, and trading impulsively is not only particularly risky (gambling), but it will significantly prolong your path to profitability. Without ample experience, mistakes are inevitable due to the myriad issues that need attention. Creating a specific action plan in trading offers clear advantages - It is something that all developing traders need to get in the habit of doing. Scientific studies, such as those conducted by Dr. Peter Gollwitzer, a Psychology Professor at New York University, emphasize the benefits of specific plans outlining the when, where, and how of an action. As a trader, you must know: What you want to see, where you want to see it, and when you want to see it. The absolute best way to do this is through creating a daily trade plan.
For instance, determining in advance that under Market Condition X and when Pattern Y appears, you should enter the market at a specified moment, set a protective stop, and monitor the trade until Z occurs. This level of specificity aids in performing actions effortlessly and gracefully, as specific plans facilitate quick and automatic responses when necessary. Many developing traders struggle with hesitation, and a plan helps to eliminate any second guessing. Planning ahead enables us to act swiftly and efficiently.
Research on making plans reveals several key insights. Firstly, specific plans aid memory retention, eliminating the need to waste time recalling actions. Having a predetermined plan allows for seamless execution. Secondly, individuals with a plan respond quickly to stimuli. In the trading world, this means being ready to respond efficiently when your setup develops. Thirdly, having a plan helps in ignoring interruptions and distractions, allowing for a focused and controlled approach, and helping to eliminate impulse trades.
Action plans become especially invaluable during high-stress situations, such as chaotic market days - FOMC, breaking market news, earnings, etc. Trading in a volatile market demands quick decision-making, and a detailed trading plan efficiently directs our limited cognitive resources. By having a well-structured plan, traders can navigate complex situations with swift and confident decision-making.
In summary, trading like a winner involves crafting and adhering to a detailed trading plan. The long-term benefits of disciplined planning far outweigh the allure of impulsive actions in the dynamic world of trading. If you struggle with creating a trade plan or identifying the right stocks to trade or index levels to engage at, join us in the Trader’s Thinktank. Every morning, we host a live stream going over the best opportunities for the day. Click here for a 14-day free trial.