Trading Mindset

There are the 3 components of a trading plan:

#1 Money Management

Money Management makes up 40% of Trading Plan.

In trading, we live on the “hard right edge”. This means that after we have entered a trade, we do not know how the market will move tomorrow:
• It may move up,
• it may move sideways,
• it may move down.

We just do not know. In this uncertainty, we have only one certainty. We can control our losses.

Using the Stop Loss Plan, we determine our losses right from the start. First, we determine our Entry Point. Next, we determine our Initial Stop Point. By doing so, we are able to determine the Risk (Entry Point less Initial Stop Point). Once we know the Risk, we can place our trades with more confidence.

To manage risk, we implement Stop Loss Plans to:
1. maximize our profits, and
2. minimize our losses

Example of Stop Loss Plan
• My stop loss plan says I will exit at 20% stop loss for every option that I have.
• Say I buy AAPL call option at $10
• 20% of $10 is $2 (my Stop Loss Plan).
• This means if AAPL call option sheds $2 of its value, say going from $10 to $8, I will sell the AAPL call option at $8. I will take the loss of $2.

You may want to click here to read more about Money Management Calculations.

#2 Trading Emotions

Trading Emotion make up 50% of Trading Plan.

Trading is an emotional game. Trading involves big, big money. Two primal emotions that we will meet in trading:
• Greed – “how can I make more money?”
• Fear – “What if I lose all these money?”

To place ourselves above our emotions, we seek to remove emotional aspects. One way of doing this is to trade strictly to our Trading Plan. 

Our Trading Plan involves:
• Target 15% ROI per month
• Keep to our Secret Blue Print Plan
• Implement  Money Management Rules, etc
• Have black and white rules for trading
• Use trading templates
• Trade with a group (optional)
• Automate your trading systems (optional)
• Reduce discretionary elements in our trading system

You may want to click here to read more about Trade With a Group.

You may want to click here to read more about Automate your Trading System.

#3 Trading Systems

Trading Sytems make up the final 10% of Trading Plan.

Trading Systems is about the technical aspects of our Trading System. These are the systems that you use to enter and exit the trade. Let us discover more about trading systems in Trading Basics ...

Next: Trading Basics ...