Chapter 29, Part I. Trading Plan Framework – Common Thoughts. Page 2

Pipruit: Sir, could you please specify, at only a few words – what is a trading plan?​

Commander in Pips: Oh, right. A trading plan is a predefined consequence of your operations in any scenario of market behavior that is based on your analysis of the market. In other words, the trading plan tells us what should be done and why (your analysis), when (price behavior) and how. Analysis is based on your trading system, “when, and how” mostly depends on your personality and risk management.

Pipruit: And why I can’t trade directly – by following market action without any plan?​

Commander in Pips: When a trader starts to deal with real account – on real money, then he feels some psyche pressure. By impact of such pressure he has a tendency to make irrational trade decisions, especially if the market jumps and chops. This pressure reaches inordinate levels when he holds a loss position. Pressure is also significant, even if he holds a profitable position. Irrational behavior due this pressure leads to early close of a profitable position and extended holding of loosing positions that leads to significantly larger overall loss or even account termination. A trading plan is made to avoid this.

By your own trading plan you know where and at what conditions you will enter, exit or reverse your position – both with profit and with loss. So, a trading plan strongly minimizes unwelcome psyche factors in trading. When you stick to it – you act by it without any deviation.

Pipruit: Hm. Is trading system the same?​

Commander in Pips: Not quite, precisely, absolutely not. A trading system is a number of tools, indicators that allow you to assess market environment and make a decision about when to sell, buy or stay flat. A trading plan is wider. It includes application of a trading system as a first step, but in next steps it describes an algorithm of following to results of analysis as if you will be right, but what is more important, as if you will become wrong. In other worlds, it includes algorithms of action for any scenario, combined with risk management, entry/exit tactics and signs of dominating and shifting of scenarios between each other.

In fact a trading plan makes your trading procedure much simpler and clearer. This is the same as appearing in an unknown town and trying to find something that you need. If you have somebody from around here, that person can clearly explain you the shortest way, where to turn and where better not to turn. A plan is similar. It will give you comments in time to keep you on track. If you still take a wrong turn – it will tell you how to correct it. Anyway it will lead you to your desirable destination. So, we can say that a trading plan is your guide that helps you to reach consistent profitability.