Last updated on April 4th, 2020
One of the biggest problems a trader faces is bridging the gap between trade planning and execution.
How many times do we hear a trader asked if they did what they said they were going to do? How many times is the answer “No”?
Getting from a strategy looking good on paper to real-world trading performance is what it’s really all about.
Without question, all the planning in the world will not do you any good if you can’t execute and reap the benefits of your work.
Some Emotions Are Reasonable
The first idea that many people will consider is that it must be a psychological issue since trading psychology is often talked about as a cog in the wheel of trading success.
But there’s a big difference between psychological problems that come out during trading and natural emotional responses caused certain types of situation.
Yes, different individuals might have varying degrees of tolerance, but frustration after a series of losses for example is a reasonable emotion to experience.
Since wins and losses come in a random distribution, it is not unreasonable to sit through a series of losing trades even if you did everything according to plan.
So if it’s not about some kind of psychological malfunction that requires some rewiring, then what is it?
No Confidence = No Trade
One issue to consider is that people aren’t particularly confident in what they’re doing and this can be rectified with a little guidance.
Understanding what it is that you are trying to achieve and what constitutes reasonable results can go a long way towards settling nerves and allowing a trader to execute how they have planned to do so.
Clarity of mind and consistency of approach will help you to start to realize the potential of your strategy.
The idea behind a strategy
Let’s say that you have some day trading strategy – you’ve seen the statistics from your back testing and you know that it’s performed well in the past. But when you trade it, it seems like you can barely turn a profit.
The idea behind a strategy often gets lost when you’re executing it.
A strategy that’s really great for trending markets for example, is not going to be effective when markets are trading in the middle of a range.
Now this might seem obvious, but it’s the higher time frame to your own that will drive your setups and it’s not always easy to extricate yourself from the weeds when you’re in the thick of a volatile trading session.
And here’s where market preparation comes in.
As part of your pre-trading preparation, taking the time each day to look at a daily chart and assess what the overall market conditions have been and are therefore likely to be, can help you to align your strategy with what the market wants to do – you should always try to apply your day trading strategy when it’s likely to be at its most effective.
A simple example is playing a momentum break from a range after a news release. Price wants to explode to higher prices and will use the positive release to entice other traders to help it along.
Build Confidence Through Testing
Just in case anyone is in any doubt about the importance of back-testing, let me make things clear – if you don’t back-test your strategy, you won’t know how it has performed over time and you will be left with doubts about how effective it is.
If you are left with doubts, you won’t execute flawlessly every time a setup presents itself to you.
But there are at least a couple of other really important benefits to back-testing.
The first is that it helps you to think in trade sets and this is essential to making sure you stick to your plan even if it looks like you might take a loss.
A trading edge plays out not over a single trade but over many trades. This is why traders who system jump at the first sign of a losing streak, often times are missing out on the positive trade runs that are around the corner.
The second benefit is that if you back-test in a particular way it can really help you to iron out any ambiguity in the rules of your trade plan because you see so many trades in such a short space of time.
Diligence in covering trade plan ambiguity can help you to master the hard right edge of your charts.
Mechanical Trade Management
One of the simplest things you can start to do is to employ a mechanical trade management scheme. If you know where your entries/targets/stops are before you take your trade, there can be no mistake as to where you should have executed.
“How Do I Back Test?”
The trouble with back-testing is that people frequently don’t know how to do it. They have a set of rules and assume that unless you’re a programming or math wiz, they’ll not be able to back-test properly.
But this just isn’t the case.
Of course there are a number of great pieces of back-testing software about, but all you really need is a way to record your theoretical trades. This could be done simply in an Excel spreadsheet:
But the key to this and going back to the idea of ironing out trade plan ambiguity, is manually advancing your charts bar by bar and paper trading the setups as they appear.
You’ll be making lots of decisions in a short space of time and you’ll see where the holes in your plan are before you attempt to trade it for real. Keep in mind that past performance does not always equal future trading results but often times, something that has worked in the past should work into the future.
Frustration – The Path To Failure
Being frustrated by a series of unfortunate losses is perfectly normal but our subsequent actions do not need to be defined by the emotions themselves
You wouldn’t go around hitting people every time someone annoyed you so you need not “punch back” when the market makes you frustrated either
If you have problems with how you deal with trading frustrations, there are a few ways you can re-balance things:
- Mental conditioning and rehearsal – go through tough trading scenarios many times in order to lessen the emotional response with practice
- Limit your self-destruct response with risk limits – this means having a daily loss limit at your broker to at least disrupt any costly trading outside of your plan
- Be physically and mentally balanced – when you’re out of balance, frustration can get to you much more quickly and you can end up boiling over
- Get into the habit of circuit-breaking your frustration – e.g. by using slow deep breathing, mantras, getting up from your trading desk and taking a walk, physical exertion
Trade Planning + Execution = Required Combination
Bringing trade planning and execution together sounds like an easy task but as anyone who has traded for even a short time will recognize, it’s not always easy.
Make sure that you know exactly how you will trade before you do, be confident in your strategy’s ability to perform and disassociate your actions from any frustration you might feel and you will be well on your way towards bridging the gap between trade planning and executing the trading plan you have devised.