All successful traders have one common, yet very important ingredient in their trading methodologies: a game plan.
“When it comes to planning, many traders can be compared to the German army during World War II–in that the invasion of Britain was planned but never executed, while the Battle of Britain was executed, but never planned,” said John C. Tirone, senior technical analyst for Chase Manhattan Bank in New York, and a trader for 30 years. “Many traders and investors go through their sometimes very short investing lives planning trades they never execute and executing trades they never plan.”
Tirone was speaking at the Technical Analysis Group (TAG XVIII) meeting in New Orleans, held last week and sponsored by Dow Jones Telerate.
“Experience has proven that success follows the wise trader/investor who identifies an effective strategy, and has the discipline necessary to carry it out,” said Tirone. He said there are two key elements that distinguish the successful trader from the unfortunate majority: strategy and discipline.
Tirone said many traders take positions “based on impulse, hunch, or what they read from a newsletter–instead of reason–and then wait to get lucky. They have not learned or probably even thought about the fact that even the very best traders consider themselves fortunate to be right on most trades, or even to make significant profits during most years.”
“If the trader will take the time to plan his trades properly, he can possibly have the odds on his side in the long run, which is something few gamblers could ever attempt to achieve. Over the long term, those traders/investors that are still operating in the markets–and who have followed a carefully thought out and well-defined plan in a disciplined manner–expect to have favorable results,” said Tirone.
The basic elements of a trading plan should provide the reason for logically entering and exiting a position, whether it proves profitable or not. “Once a position is entered, the price can only take three paths: rise, fall or remain unchanged . . .”
“The heart of a game plan must indicate, unequivocally, how the trader is to exit from a trade he has entered.” Likewise, this critical area consists of three parts: 1) accepting losses if a position shows adversity; 2) a plan for accepting profits; and 3) a plan for exiting a trade if the price, over time, is negligible or does not meet expectations.