Wednesday, August 24, 2011

Justified vs. Unjustified

What's wrong with deviating from your trading plan if you make a profit anyway?

Making an occasional winning trade, even when you throw your trading plan out the window, may provide short-term pleasure, but entering trades haphazardly can adversely influence your ability to maintain discipline in the long term.

Trading is a marathon, not a sprint!

Man flipping coin
When you stop following your trading plan, you become rewarded for lacking discipline and you may start believing that abandoning a trading plan is no big deal.

An unjustified reward may increase your tendency to abandon trading plans in the future. You may be prone to think "I was rewarded once, maybe I will be rewarded again. I'll take a chance." But the positive outcomes of undisciplined trading are usually short-lived, and a lack of discipline ultimately produces the long-term trading losses.

It's important to distinguish justified wins from unjustified wins.

A justified win is when you create a very detailed trading plan and FOLLOW the plan. A win that results from following a trading plan is justified and reinforces discipline.

An unjustified win occurs when you make a plan but don't follow it or if you have no plan at all. You might be rewarded, but the outcome occurred by chance. You might as well flip a coin or hang a printed copy of your charts on the wall and throw darts at it to help you make trading decisions. The win is unjustified and can reinforce undisciplined trading.

Maintaining discipline is vital for consistent and profitable trading. Trading is a matter of getting the law of averages to work in your favor. You trade proven trading strategies, over and over, so that across a series of trades, the strategies work enough to produce an overall profit. It's like making shot after shot on the basketball court so as to accumulate a winning number of points. The more shots you take, the more likely you will amass points. Just look at Kobe Bryant or Dwayne Wade.

The winning player is the person who first develops the skill to make the shot consistently, so that at every possible opportunity, the ball is likely to go through the basket. They've developed the skill to learn how to shoot the ball the same way every single time. Consistency is crucial!
It's the same for trading. One must trade consistently, following a specific trading plan on each and every single trade. If you trade one approach this time, and a different approach at another time, your performance will more than likely be haphazard.

We can't stress this enough...
You have to allow the law of averages to work in your favor, so that across a series of trades, you will make an overall profit.

If you follow the plan sometimes and abandon it at other times, you throw off the
probabilities, and you will most likely end up losing overall.

With discipline comes profitability. Don't let unjustified wins interfere with your ability to maintain discipline. Follow your own trading plan, and cement in the mindset that if you follow your plan, you will end up more profitable in the long run.

Now that we're done explaining how important a trading plan is (can we stress this enough?), it's time for you to learn what should go inside a good trading plan.

(See more)  Getting to Know Yourself
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