Today we are going to cover the contents of FoT level 3 class 1: the effective trading loop. And we are back with part 11 of our Foundations of Trading blog series. As always, if you wish to review our previous blogs covering the Foundations of Trading classes, please click on the Foundations of Trading blog category on the right-hand side of the page. That will instantly bring up all the blogs from this series for you.
There are external and internal forces each trader must face as they navigate the world of trading. The external forces which cause the market to fluctuate are such factors as the news cycle, company earnings reports, and the law of supply and demand. These are forces that are beyond a trader’s control, and we must learn to traverse them accordingly by adopting such tactics as setting trade entries, setting trade targets, and setting stops. Ultimately, we can do little to directly adjust or influence these forces, but we can learn to mitigate their effect on our trades.
Then there are internal forces that are entirely in our control but are still significant challenges and roadblocks for individual traders. Internal struggles include letting our personal bias infiltrate our technical analysis or linking our success to the size of trading profits. However, just like learning to deal with external forces, we can do a few things that will balance the playing field when it comes to internal forces.
When facing the various internal forces that a trader is up against, there are three very distinct ingredients or elements that a trader can put in place to help alleviate the effect of internal roadblocks: correct analysis, appropriate planning, and accurate planning execution. One of the best methods of determining if your stock analysis is on target or not is by tracking your win-loss ratio on your trades. Our benchmark around Tradesmart is to be correct in our analysis around seventy percent (70%) of the time. As for the quality of planning, using a Return on Investment ratio or ROI is one of the best ways to track if your trade planning is on target. Finally, strict adherence to your trading plan is a marked result of your accurate execution for each trade.
There are a few action steps you can put in place to help establish a firm foundation for trading. You should create a trading plan and solidify it by writing it down. Then test your analysis and strategy by practicing virtual and back trading. If you virtual trade, you can do it in real-time with today’s market. I tend to do it this way as it keeps me from looking ahead when back trading. Or you can go back in time and learn to trade from a stock’s historical data. Finally, journal all of your trades and closely track your metrics and results, as it never hurts to write down your analysis and your entire trade forecast prior to execution.
When it comes to implementing the Effective Trading Loop, there are a few guiding principles that Tradesmart recommends. First, you should reset your escrow account monthly. A good guiding principle is about 5% to 10% of your trading account size. Secondly, you should consider setting your reward at 25% to 50% of your previous month’s average profit for a growing trading account. Finally, you should consider setting your reward at 50% to 75% of your previous month’s average profit for an established trading account.
In closing, it helps to establish a pattern of practice to develop your trading muscle. By taking a little time each day or each week to plan trades, setting up virtual trades, and following through with your trading plan, you will find trade by trade that practice does build a firm foundation upon which you can stand. Thank you so much for reading, and we look forward to seeing you in next week’s Foundations of Trading blog!