Aug 032011

For a while now I’ve realized that my plan allows too much discretion.  Being a smart guy, I felt discretion would help me.  Now I know better.  The main problem with discretion is it’s hard to know if a trading “system” (methodology?) work.

For example let’s say my plan says enter long at X and target at Y.  So I enter at X and then a few minutes later I see a ton of selling against me and so I figure “why give back my profit I’ll just exit here”.  And then what happens?  The majority of the time, price will pull back, sometimes coming a few ticks from my entry, and then zoom on to my target with me on the sidelines.

Being “smart” isn’t always a good thing in trading.  Some of you may be laughing, possibly because this happens to you.

The problem with making this decision while trading is we’re affected by emotions and stress.  If I’m down for the day and this 2 pts will make me positive, I’m really not going to want to risk giving it back.  However that’s exactly what I should do.  Over the long term, the probabilities may be better for me to hold for the target.

In One Good Trade Mike Bellafiore wrote about this decision making.  He said traders should have a list of scenarios where the actions are pre-determined.  So if you want to know what to do, you find your scenario and then do the action.  He gives some examples in great detail on page 242.

Add that to the list of things professional traders are doing and I’m not.  To correct this, I’m currently rewriting my trading plan from scratch with the goal of making as many decisions as possible while writing the plan (when I’m not stressed out in a trade) and taking as many decisions out of the trading session as possible.  Any decision that should be made in the trading session should by found in a list of if-then statements.

This is an ambitious goal and I don’t think all decisions can be removed from the trading session.  However if I can just remove a third or a half that could have a huge impact on my trading.

For example, have you ever planned to get long at a major support level yet the market came down towards it so hard and strong that you “didn’t want to step in front of it”?  So you didn’t take the trade?  and then watched it go 4 pts in your favor?

Calmly, while not trading, you can could up with all the scenarios for how price can come down to your level.  One of those will be:

IF price drops to my level very hard and strong THEN I will __________


  • “Enter the trade and monitor for continuation” (Dalton)
  • Pass on the trade
  • Wait for a retest of the level
  • Wait for indicator X to give a buy signal
  • ….

What you decide here is actually not important.  The important thing is when this scenario happens in real time trading, you do what the plan says to do.  This way, over time, you’ll be able to measure whether the plan works.

Now imagine you don’t do that.  Price comes down, you take it and stop out.  So you say to yourself, I’m not doing that again.  Same situation comes up the next day and you pass, and the trade goes 4 pts your way.  It’s not possible to measure the plan if one is changing it, almost randomly.

Yet that’s what I’ve been doing in a lot of my trading!

So I’m about to embark on another mini-journey.  My journey so far as been like climbing mountains.  I climb one and then I’m on the plateau and realize that I must climb the next mountain to continue higher.  I’ve been at a plateau here for 3 months.  I’ve been making a decent income and learning a lot, but I really want to take it to the next level, which for me would mean trading larger size.  Almost a year ago I wrote that I’d like to trade 100 contracts some day.  I’m now taking it one step at a time.  I’m trading 2.  I want to trade 3 consistently profitably.  And then 4.  Etc.  If I can do it with 4 then I know I can do it with 6 and so on.

This is going to require changes in the way I trade especially the way I feel about losing.  I need to reprogram myself.  I need to break bad habits.  And that’s going to take some time.  I feel the best way to do this is to go back to the simulator.  I hate to do that as I like the idea of getting paid to learn.  But what I want to do is radical.  For example I want to go back to using the footprint and try having really tight stops.. like 4-6 ticks.  That’s radical and I’m not sure I want to risk losing my money while trying it.  So that’s plan my plan.  Do it on sim.

Also in a week we leave for 3 weeks of vacation in the south of France.  Last year I worked on my trading plan and practiced on simulator.  That worked well as it was stress free and didn’t interfere with our trip.  With two young kids who take naps and 3 weeks, we have lots of time to relax.  So Rewriting the plan and testing out ideas on simulator could be a good thing.  Of course if I get tired of trading I may just play penny poker instead.

Every time I’ve gone back to sim, it has helped me immensely and I don’t think this time will be any different.

It late September it will be one year since I wrote the A look back on my journey series.  I’ve learned a heck of a lot since then, and I’m a lot more consistent now.  But I’m still a 1-2 lot trader like I was back then.  I really do want to take this to the next level and the one year anniversary of this series will be a good milestone for me.

Furthermore the volatility right now has me trading scared.  Silly I know but I have been burned a few times and now I need to build up emotional capital.  So far this is a loosing week, my second in 3 months.  This isn’t catastrophic, but it’s a bit depressing since my losses were due to my lack of discipline.  If I took great setups by my plan and they didn’t work, that’d be fine.  But when I screw it up, that’s not fine.

So putting all this together, I think a short break from real money trading is in order.

As always, I’ll continue posting about my progress.  I want to hank everyone for the encouragement and especially the friendships & collaborations that have resulted from this blog.  It has been a lot more productive for me than cherry picking winners and pretending to be a great trader as so many others do.  My exposing my problems I help myself to improve.

Thanks for reading.




  5 Responses to “Revising the plan”

  1. I think this post is SPOT ON! There’s nothing I can add except to say if most people concentrated their efforts on this angle of trading, they’d probably dramatically improve their chances of getting to long-term profitability…those that are on their way would get there quicker and those (like yourself) who have already achieved profitability because they are doing enough other things correctly, would get to that next level.

    “What you decide here is actually not important. The important thing is when this scenario happens in real time trading, you do what the plan says to do. This way, over time, you’ll be able to measure whether the plan works.”

    It took me a long time to understand that. Brilliant stuff.

  2. Hey Michael,

    I hope you don’t mind me offering different view (and opinion).
    I’m also having lots of difficulties in my trading, especially the trade mngt part, i.e small stops, and as opposed to you I didn’t have any winning week yet (trading for 5 weeks now – all losers).

    How re-writing the plan will take you to a 2-4 lot trader? how going back to sim will do that?
    I think that a trading plan is something that evolves, you don’t stop and re-write it, you try to re-write it as you go.

    Do you write notes during the day in your notebook? I user Evernote as a place to throw all my thoughts and observations, with screenshots, it is stored on-line and available on my mobile as well.
    I group the notes into 4 groups: Homework, Market Profile, Psychology, Tactics. here is a screenshot

    This is how I try to evolve my trading plan on the go.

    Regarding your comment “why give back my profit I’ll just exit here”. I think It depends how far it went in your direction and how many contracts you trade. it is ok to define a target 4-6 points away, but reality is that one can NEVER know, and if you trade 1 contract and can’t hedge after 6-8 ticks there is no wrong taking it off after 6-8 ticks, your expectations should be real, with 1 contract you should target for the first scale.

    I thought also of going back to sim to practince 2 lots, but for me sim doesn’t really help as psychology isn’t being practiced, as an alternative I’m thinking of trading the SPY, buy 300 shares as if it was 3 contracts. this way I can practice multiple lots scales, have psychology issues, have capital exposure of less than 1 ES contract (500 SPY shares is 1 ES contract).

    Just my thoughts, hope it is ok…

    From what I saw so far you doing ok+, dont be too hard on yourself…

  3. Thanks for the compliment Market Monkey.

    ValYouW – I think a response deserves its own post so that others will see it.

  4. thanks
    verey good .i am i my on way and it help me
    i think that ” plan the trade and trade the plan” is not so esey – our feeling are between.

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