Should You Trade Naked?

Date Monday, May 11th, 2009

When i first started out and was exposed to the world of trading in the year 2006, the first most important thing that i was being told repeatedly by experienced traders, was to never trade without a plan. “Trade without one, you are just a naked soldier in the battlefield without your armor”.

In life, we all have plans. Be it traveling, buying your first property, starting a family…etc Trading is one of the toughest career that requires you to have a plan. This is your carefully thought-out plan with methods of approaching, managing and exiting the market. The overall goal? It is to beat the market consistently over the long term making capital gains. With the aid of a trading plan, it is also to help you eliminate emotions from the trading equation, which is the cause of many traders downfall.

Art of warEmotions tend to cause many problems in trading such as entering trades unnecessarily and at the wrong timings, remaining in trades due to greed after profits should have been taken, becoming emotionally attached to certain trades that jeopardized future trades, exiting too early with minimum profits due to fear when the potential to make larger profits is present.

So what are the main benefits for having a trading plan? They are time saving, eliminating emotions, aid in trading decisions, money management and trade exiting decisions.

Having a trading plan will save you a lot of time when it comes to decision making on whether to make a trade or not. The set of criteria and rules in your plan will do that for you. Besides, this plan can be repeated, tested and improved over time to make your trading more profitable. If you base your trades on emotions, the end result would probably be that you are unable to go through this process as your emotions will hinder in your decision making and cause you to react in a disadvantageous manner.

The market is always in a constant flux of emotions, however, traders who have a well laid out plan can avoid drowning in this barrage of emotions and handle each situation confidently since they already know in advance what to do and not to do. This will help in making good trades consistently and also provide a track record that shows the trader whether the success or failure of his or her trading career is due to wisdom or sheer dumb luck.

Clearly, having a plan is better than none. Even when the situation doesn’t favour your position and results in a loss of money after you diligently followed your plan accordingly, it just means that there is room for further improvement. If trading is your cup of tea, the very first thing to do is to start working on a good plan.

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