The Risk of Trading: Mastering the Most Important Element in Financial Speculation

THE NEED FOR PLAN COMPLIANCE

In my work with traders, I have seen many who back-test their strategy before implementing an identified holy grail strategy in a live environment. One characteristic flaw of novice traders is that they implement their strategy differently live than in their back-testing. I'm always asking myself questions when performing trade journal audits. Why did they miss this trade? Why did they hold past target? Why did they take profits too early? Why did they not follow the plan or “contract bets” that I assessed and validated? It's this determination of root cause that is the value offering of any auditor or coach that is worthy of their fee.

Ultimately, it is the trader who assumes responsibility for every trading decision he or she makes. It is a common response found in trading books, convention presentation disclaimers, and coaching articles. I find the response somewhat cynical when a trader is told this. Back when I started trading, I would have a confused glaze on my face when told about my trading responsibilities. “Why, of course I am responsible for my decisions! How does that make me a better trader?” Only later as my trading improved did I truly understand what I originally considered marketing psycho-babble. For my first few years of trading, I was of the belief that it was my responsibility to be a “winning” trader. It was logically defined as having winning trades and “beating” the market. I even defined my trades as winning or losing. An executed ...