Sun Tzu teaches that there are four stages of planning for victory:
1. Gather intelligence.
2. Formulate strategy.
3. Execute plan.
4. Exit plan.
Creating a trade plan will:
• Help you control your emotions.
• Help you implement your analysis.
By reading the market first and then making logical entry and exit decisions based on your thoughtful analysis in advance, you reduce the risk of making a poor trade. You simply set a trap for price. If price falls into your trap, you trade your plan. If it does not, you set another trap and wait. In other words, take the high ground and wait for your adversary to come to you. Do not fight on a level playing field.
Your strategic planning will give you a tactical advantage and you are more likely to be victorious. You are not guaranteed success, but the odds are much more favorable and less risky. By creating a plan in advance and waiting to execute it, you remove a lot of emotion from your trading. You are no longer reacting to the market, you are simply executing your plan. In fact, you will be spending more time waiting for your trade setups than trading. Inevitably, this is less stressful.
Removing emotion will help you avoid stupid trades based on greed and fear. By relying on logical plans, your trading becomes repeatable. By trading when the market is behaving in predictable ways (this is what your plan really is—your prediction of future price action based on past results), you are removing stress.
Stress is ...