#2)Always Use a Trading Plan.
Trading plans are of the utmost importance; they're different from a trading methodology in the sense that a trading plan is a structured set of tactics that you're going to employ that do one, and one thing only. Give you solid guidelines on how to stack probabilities in your favor. Again trading is nothing more than executing on high probability scenarios. Simple math suggests that the market, because it only moves one of three ways, up, down and sideways, means that you have a 33% chance of being successful on any given trade.. theoretically. A trading plan is designed to execute on tactics that increases the probabilities. A trading plan is a written set of rules that specifies a trader's entry, exit, and money management criteria for every purchase. For me, my trading plan is relatively simple. I follow a four-part process on every single trade… First and foremost I'm looking for a catalyst. I need to see that “thing” that is going to create short-term volatility which I can trade. Once I find volatility I have to know where I'm getting in, where I'm getting out in profit and more importantly where my stop loss is placed in the event that I'm wrong. A trading plan is simply a rule-based situation that helps employ high probability tactics which increases the chances of your trades working out more often than not.
With today's technology, it is easy to test a trading idea before risking capital. Known as back testing, this practice allows you to apply your trading idea using historical data and determine if it is viable. Once a plan has been developed and back testing shows good results, the plan can be used in real trading….although, I strongly suggest doing a block trade of at least 20 - 40 paper trades before moving to capital!
The key here is to stick to the plan. Taking trades outside of the trading plan, even if they turn out to be winners, is considered poor strategy, and will, with time, draw your account to zero! As I have mentioned in the past, the real name of the game is risk management. Implementing risk management parameters that hedge the unforeseen will be the difference between staying in the game or getting knocked out! Risk management ranges from positioning sizing, to market specialization, reward to risk ratios, win ratios and more. The MORE risk exposure you can reduce the better.
Back test the shit of everything!