Your number one priority as a trader should be to develop a trading plan. However, what if you have a plan, and ahve implemented it with the utmost consistency and your plan is just not producing the results you want. When is too soon to change your plan?
As a trader, you must understand that you are not going to have a strategy that wins everytime. But how many losses do you endure before making a little tweak here and there?
I believe that a successful plan evolves slowly over time. However, knowing how, and when to change your plan is difficult to know. But there are some basic rules of thumb to keep in mind to when it comes to changing your plan.
First of all, whether or not you should even consider changing your plan, assuming you have been implementing your plan consistently, depends on how long you have been working your plan. Changing up your strategy based on incomplete information. Furthermore, it is not smart to abruptly change a key aspect to the plan based on a incomplete information. At an absolute minimum, you should be at least 20 trades into a plan. If your trading strategy is way off, 20 trades is probably enough for that to become clear. But ideally, you should be looking at being 50 or more trades into your plan before you really have enough information to really get a handle on whether your plan is performing or not.
Once you have enough trades under your belt, the next step is to track your results. It is virtually impossible to make any improvements to your plan without keeping track of your results. And going from memory is just not enough. Knowing you've won the last 3 out of 5 trades is not enough information. Remembering any further back is difficult, and what you do remember is likely more based on emotion than fact.
To keep track, you will need to set up a spreadsheet in a program such as Excel. A basic spreadsheet will include Date, Symbol (currency Pair), Action (buy/sell), Lots, Risk (in dollars), Reward (potential gain), Result (in dollars), Equity (balance in your account), and Notes. More complex spreadsheets can include all sorts of statistics that can provide more information, but a basic chart is a good place to start.
Once you have a large set of data in your spreadsheet, you can begin to look for some trends in your losses. Are you managing risk properly (i.e. when you take a loss are they typically quite large?) Did you lose most of your profits because of a trade you refused to close out? Do you have a bias towards making poor decisions on "short" trades? Counter-trend trades? You need to look at what your losses may have in common, and this can mean looking at a number of factors. Once you identify a possible problem, you can change your plan to rectify it.
It is important to isolate each identified issue and change them one at a time. Again, you need to make a minimum of 20 trades, preferably more, before you try to reassess the situation. If you change your plan more often than this, you will never know what is actually working and what is not. Changing your plan takes just as much discipline as following it.
Taking these steps, you can effectively change your plan to slowly become more and more effective in a perpetually evolving market. In trading there are, quite simply, no absolutes!
Good luck traders!
From the Desk of:
Aaron Reid
BDI PowerGroup
