On a recent Saturday morning, I did a webinar on the psychological aspects of trading. Without a doubt, trading psychology is my favorite topic to discuss, and in my opinion it’s the most important by a mile. It is a topic most traders realize needs to be addressed but usually do not want to think about. That’s because during the conversation the importance of a trading plan will be stressed.
I know when I bring up the subject, many of you groan and most likely it is for one of two reasons. The first is you have heard before that you need to have a plan and follow it but have not created one yet. The second is you already have a plan or have started one but are not following it. In either case, this will serve as another little reminder.
So Hard to Just Get Started
Before starting to write a trading plan, traders need to ask themselves if they are truly motivated to succeed. It may sound insulting to ask, but traders really need to find out the truthful answer to the question. Will you put in the time to be successful (whatever that means to you) as a trader? The trading plan is a huge component. There are going to be highs and lows along the way. Will you be able to handle them? Will you be disciplined enough to write and follow a trading plan?
Trading has both internal and external motivations. External motivations cannot be controlled, such as making money and being right about the outcome of a trade. Internal motivation is the drive that traders need to get through the many challenges trading can bring, like being wrong about a trade and wanting to quit altogether. Mentally, it is a battle!
Before creating a trading plan, I tell traders to write down their strengths and weaknesses outside option trading. Who is going to know you better than yourself, right? This can determine, based on your personality, what type of trade plan would best suit you. Are you patient or impatient? If you are impatient, maybe longer-term trades are not for you or those type of trades are just what you need. Are you a risk taker? If you are, selling premium on options where losses can be substantial may be an option for you, so to speak.
I know it may sound like I’m beating a dead horse here, but I do it for a reason. Writing and having a well-thought-out trading plan is essential to your potential success. And like it or not, I will keep reminding you to write yours.