Trader Tip: Top 7 Faults in Trade Plans Here at Blue Point Trading we get a lot of Trade Plans, as people come into our Bluepoints Programme for New Trader Applicants. It gives us a chance to review many of them directly with traders that work with us and makes us uniquely qualified to give our opinions on what are the most common faults in them. After all we have seen hundreds of Trade Plans, hence you start seeing the common faults in them, as well as the trading results that these Trade Plans yield.
First off, this Trader Tip is not specifically about how to build your Trade Plan. This can be found in detail in our eLearning package we offer as part of our trader programme. However, click here, for a past article written on a high-level overview of what we feel should be in a Trade Plan. A lot of thinking has gone into this to make it simple but complete and concise. We prefer to call this a Trade Plan framework, as it covers the different aspects one should consider on each trade. With that, let’s get into what we feel are the top 7 faults in Trade Plan:
(1) Too generic: Probably the most common fault, but we get a lot of Trade Plans that say, “I trade breakouts, using pivot points, Bollinger Bands and a 23-period moving average.” This is a trading idea, not a Trade Plan. Now there may be something behind this and the trader perhaps just didn’t take the time to write it down. Unfortunately, in most cases the trader is just guessing, and in the heat of the day trading effort, random results will occur.
(2) Too many indicators: This too is a common fault. Often we get a potpourri list of indicators that the trader puts on their charts. After all, more they think is better. Right? Often you can not even see the price of the instrument on the chart. This generally leads to confusion, as the trader really does not have a clear idea of when they jump in or not, when reading the many, if any, of these indicators. If you have more than 3, this should be a cautionary flag.
(3) Undefined chart parameters: Seemingly a small point, but if you have not put the parameters in the Trade Plan, it tells me you have not really thought the Trade Plan through. Worse yet, the trader often does not know what time-series they really will use. Often saying, I look at the 4hr, 1hr, 15mm and 5mm charts. And do what exactly with this? Undefined = random trading = poor Trade Plan.
(4) Lack of a clear pictorial: This one is my pet peeve. I rely heavily on the chart pictorial to be able to review the trader’s Trade Plan. Often one glance at the Trade Plan pictorial submitted, and can make a fairly good assessment if the trader is a loser. Often it does not even match the write-up. A picture is worth a 1000 words, except when it unclear. I should be able to look at the chart pictorial submitted and understand the Trade Plan. If not, something is wrong. My quick assessment over the past year is that less than 25% of the traders do this correctly. The trading results often bear this assessment out to be true.
(5) Poorly defined Triggers: The Trigger, is of course one of the first things a trading coach will focus on when getting into the details of a Trade Plan. It needs to be simple, clear and concise. Here is your test with this one. If I gave your Trade Plan to 5 other average traders, and gave these same 5 traders the same unmarked charts, would I get the same trade execution? – at least on paper? If not, it is poorly defined. If it is unclear to others, it probably is unclear to you. More random trading. Again, my assessment here is that less than 25% have done a good job on this point.
(6) Stops too variable: Similar to the Trigger, the second item of great scrutiny on the Trade Plan is the Stop. Too often I see, “I stop the trade if support breaks.” Oh really – and how do you define that? Or perhaps, “I stop out if falls below the Low of last week’s pivot, the RSI is turning against me and the Bollinger Bands flip upside down. Traders often put so much wiggle room on their Stops, that in effect, they have no Stop. A Stop is a Stop!
(7) Poor understanding of risk vs. reward: This one is a little harder to grasp, but sometimes traders are just unrealistic in their Trade Plans. For example; I trade the 4hr charts, and when the bit twiddle Triggers, I jump in for a 100 Pip gain, with a really really tight Stop of 4 Pips. See how well I manage risk tightly? Oh dear. The Stops need to wide enough to let the trade develop, that correspond to an appropriate level of profit. The ratio of Target to Stop needs to be around 1:1 to 2:1. If we can not clearly see this, chances are your Trade Plan won’t work. Unfortunately as well, traders fail on the execution of this, though often correct in the write-up. This is due often to an unrealistic Trade Plan, that gets modified on the fly of the fast paced day trading venue.
Of course, Trade Plan execution is another issue. Just because you have a well written Trade Plan, does not mean it will be executed to plan. We hope you have found this Trader Tip useful and will motivate you when writing your Trade Plans. Click here, or watch below a video representation of the Trader Tip: Top 7 Faults in Trade Plans.
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