One common mistake that traders make is not following a trading plan. Without an excellent system on paper, you are far more likely to trade based on guesses and hunches. Some traders feel that there is nothing wrong with this. Making trades based entirely on gut feeling however puts trading at the same level as games of luck. This is like saying that your success depends entirely on the whim of fate.
A lot of other things can happen in the absence of a good system. Aside from putting everything in the hands of luck, not having a system can also increase your chances of making deals based on emotions. You might for example decide to jump on a bandwagon because you don’t want to lose the chance of possibly gaining from the next big thing. You might also decide to hold on longer or let go sooner of a trade than you should because you become overwhelmed by the fear of losing.
What is the best trading plan? It is one that should help you make trades based more on logic than on feelings. For you to succeed with your framework however, you have to make sure that you promise to commit to it no matter what happens. Whether you win or lose, sticking to your system is vital.
It’s fairly easy to decide to make a commitment to a strategy. Before you do however, you have to make sure that it has a high probability of working. Knowing that it does work will increase your confidence in it and will thus confirm the advisability of committing to it.
The only way to test how well your strategy will function is through back testing. This is the method of testing your trading plan against a set of past trading data. In other words, this is a way of seeing how a system would have performed if it were used on past trades identified using your predetermined criteria.
You can manually back test your system. This however will most surely be a labor intensive task. Moreover, it might be a particularly difficult choice because you may not always have access to the necessary data for testing. An alternative to manual testing is to use a software tool. There are a couple of tools available online that you may want to try. Some of these offer their own sets of data. It is often better however to settle for programs that are compatible with third party data providers so you can choose those that provide the kind of data that are specifically important for you.
Back testing is not the only trading tip that you need to consider when looking for a system that works. You also need to make sure that you settle for a system that matches your specific trading goals and risk management guidelines. In other words, it is often a good idea to avoid following a popular and successful system in its entirety even if other traders have found success with it. Although it isn’t a bad idea to pick a few insights from tried and tested plans, make sure that the resulting system is one that is designed for you.
There are some who claim to hold the secrets to the best trading plan on earth. Bear in mind though that the real best system is one that is tailor-made for you.
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