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Plan your trade, trade your plan is an old maxim in the markets that almost everyone ignores.
The reason is obvious, of course. Financial markets are the least predictable environment there is. Every day is different from the last and anything can happen at any given time. Executives at Amazon, for example, can predict within a few packages, the demand for some product from a particular zip code at a particular time of the day. This is especially true for highly consistent products like soap, or cereal, or shaving cream that people reorder all the time.
In real life demand for goods is remarkably consistent since it must satisfy physical needs that are inviolable. In financial markets – especially in speculative ones – demand is totally mercurial. If you still believe that currency markets exist to help corporations and investors to settle their cross-border transactions or that oil markets exist to help producers and consumers find a settlement price – you are woefully naive. More than 97% of all activity in both markets is purely speculative in nature – meaning it does not emanate from an actual economic need for the product. The average daily volume on NYMEX for crude oil is 22 Billion barrels of notional value. The actual daily demand in the real world? 80 Million barrels per day.
Whether this is good or bad is a philosophical question that I will put aside for now. But the wide gulf between how real world markets behave and how financial markets function goes a long way towards understanding why traders have such a hard time “planning” their business. The volatility of trading simply does not have any legitimate parallels in the real world which is why almost all “real world” business advice is worthless.
And yet… the longer I trade the more I begin to appreciate the value of planning. As traders, we can never expect the kind of control that real world business people enjoy, but that doesn’t mean we should operate by the seat of our pants as a result. This is especially true if you are trading some sort of systematic approach on a day trading basis. Day trading systems have the very big advantage of the law of large numbers. The more trades you make, the more likely the possibility that the large volume will smooth out the volatility spikes of the financial markets.
If you are trading a system here are three simple questions you need to ask yourself at the start of each week.
How many trades do I expect to make this week?
How many winners versus losers do I expect will occur?
What is the pip target this strategy will likely produce?
This is hardly the Big Data-regression-driven-sophisticated-stat analysis that exists in the real world, but it’s enough to ground you in making much better trading decisions for the long term. Just asking those 3 simple questions can tell you if you are overtrading or not trading enough. If the volatility of the markets is aiding or destroying your win ratios and most importantly if you are actually following the system that you claim to trade.
Setting expectations doesn’t mean that you are now a prisoner of your rules – quite the opposite. It means that you can now exert a modicum of control over one of the most unpredictable human activities there is.