Why do we need a structured trading plan?

Every serious trader needs a structured trading plan that they can follow to achieve good results. But first we need to understand what it is, what it looks like and why we need it.

In the next part of our series discussing the psychology of trading from our trading psychology course, we'll talk about why it's important for traders to understand how the markets work and how this will help them in creating a structured trading plan. This is because it is one of the cornerstones of success for any serious trader and therefore we should know what it is, what it looks like and why we need it to be successful.

Why do we need structure?

Anyone new to trading may have initially struggled to read the information on a chart, which may have looked like a jumble of rectangles. After a while, they can identify trends and patterns, i.e. they can see the structure in the market and understand what is happening in the markets, but they have to learn how to approach the trading itself. And that can be a much tougher nut to crack.

Given that forex can be traded virtually 24 hours a day during the working week (and even 24/7 with Bitcoin), some traders may tend to keep their platform open and trade at times that make little sense to them. To avoid something like this, we need to create a personal structure or framework that keeps us focused, consistent and in control.

Freedom or structure?

The problem is that many traders do trading for the vision of freedom and independence, so they may have a problem with the rules at first sight. But in reality, the rules and structure practically support this freedom in trading. In fact, structure is not about limiting us, it is about giving us clear rules. So let's define a system with clearly defined trading hours, entry and exit rules and strict risk management. This will mean that we will lose a certain number of potentially profitable positions. At the same time, however, we will avoid countless positions in which we could make unnecessary mistakes and lose a lot of money.

Our own rules

Another advantage of this approach is that we set our own rules. But to make it work, we need to start from principles that apply generally. In the last part, we talked about the SMART method to help us with goal setting. When setting our own rules, this is also true because our strategy should be specific and measurable so that it makes sense.

Vague or specific rules

A strategy such as “when price moves quickly from support or resistance, wait for confirmation and enter with reasonable risk” is neither specific nor measurable and tends to raise more questions than answers.

• • What does “moving fast” mean?
• • Which levels of support or resistance?
• • What is “confirmation”?
• • What is “reasonable risk”?

In contrast, the strategy shared with our coach, Michal, by one of his clients looks clear, specific and actionable at first glance.

"Use H1 chart. If price breaks the last daily high or low, wait for the candle close. If it closes above or below that level, enter with a 0.5% risk. Stop Loss is below or above low or high of H1 candle that made the breakout. Profit is three times the size of the Stop Loss."

In short, a clearly defined strategy leaves minimal room for error and emotional or impulsive decision making. It is an approach that makes it very clear to us at a glance whether we are going to follow it or not.

Don't forget to manage the trade

Sometimes traders have a clearly defined entry strategy but forget to manage their positions and exits. It may happen that when our trade reaches 30% TP, we move the SL to break even. Price then reverses, closes the position at BE and then continues in the original direction, but without us. Next time we will not move the SL, even if the price is at 80% of our TP and after the reversal the direction does not change and we implement a full Stop Loss.

In order to avoid such uncertainty and unnecessary losses, it is a good idea to set rules for managing your position. A simple example would be moving the SL to BE when the price reaches 50% of TP. Yes, sometimes it happens that some positions with potential high returns end up at zero. But at least we will have peace of mind.

From Structure to Execution

Once we have a structure and rules, we need to ensure that we follow those rules in every trade and that we take the same steps every time. The key is to define all the steps that lead to opening a position. The more specific we are in doing so, the easier it will be to follow them. Here's an example that can be used, but everyone should make a list based on what works best for them and what is most effective.

• • Check your mental state: How do I feel? Are there any emotions distracting me?
• • Check the news: Are there any events that could affect the market?
• • Check the daily high/low: Mark the previous day's levels.
• • Mark your zones: Highlight areas of support and resistance.
• • Set up alerts: Let the system notify you when price enters key zones.
• • Define SL/TP: Schedule your Stop Loss and Take Profit levels.
• • Evaluate Risk: Decide the size of the position based on acceptable risk.
• • Wait for the outcome of the trade: No intervention unless it is in the plan.
• • Write the trade in your journal: Record your results and decisions.

Creating a checklist that lists all steps, including the ability to check them off, will help us achieve consistency with our plan.

The Importance of a Checklist

While many traders feel that they don't need a checklist after a certain amount of time because they do things automatically, the opposite is true. In fact, trading is quite a stressful business, which leads to mistakes. However, it is the regular checking of the list that can help to alleviate this stress and thus avoid these mistakes. The list relieves our mental capacity so that we can stay focused and objective. So, once we create one, we should use it and it should become part of our routine. Because the difference between an amateur and a professional is not in knowledge, but in consistent practice.

Psychological Traps

So once we have a trading system, know what to do and have a checklist, all that's left is to trade and be successful. In reality, and everyone who has ever tried trading knows this, it's not that simple.

The market is full of psychological traps and therefore doing the same thing over and over again is not easy. In fact, traders tend to doubt something that works very well. We start thinking about changes in the system and after a while, there are so many changes and adjustments in the system that it becomes overcomplicated and we get lost in it and we don't even know what worked initially.

Watch out for dopamine

This is due to our brains being set up to reinforce behaviors that bring us positive results. This happens in learning, but also in trading. As we wrote in the last part on expectations, what happens in trading is that when we do something properly and consistently, there can be losses. Conversely, when we make a mistake, we can end up in profit. And that's a problem because these rewards on an irregular basis create a dangerous loop:

• • We know we shouldn't do it.
• • We've already saw that it didn't work.
• • But sometimes it works.

These irregular rewards, according to scientific research, increase levels of the dopamine chemical associated with motivation and pleasure. That's why gambling is so addictive. And it's also why trial-and-error trading can create deeply rooted bad habits.

Biologically speaking, it is almost impossible to cultivate trading discipline purely through trial and error - because our brains reinforce the perception of mistakes that end in success, and conversely, disciplined trading can be perceived as a problem when it ends in loss.

How to build discipline?

Traders often want something, it will make them disciplined. Coach Michal often answers them that they already have it in them because it is their own willpower. At the same time, it's important to remember that we don't become disciplined overnight. The key is simply to stop focusing on the results and start focusing on the process.

Thus, the only goal must be following the system. It must not be about making gains or avoiding losses. It's just consistent adherence to the system.

So what do we need to do?

First, we need to be clear about what we want to be disciplined with. So the target may be our checklist or our trading system. It's about making sure that we follow every item on the checklist exactly.

Then it is a good idea to implement a feedback system. Some traders add notes to their journal, but this can be cluttered with too much emotional or contextual data. We can use a spreadsheet with the trade date in one column and the result in the other. And depending on whether we've followed all the points in the list, we mark the outcome in green (if yes) or red (if no).

The results themselves are not at all important, the colors reinforce the perception of the process over the outcome. Thus, this simple tool provides very quick information on how we are doing and gives us a clear picture of our trading behaviour as well as our discipline.

Let's face it - memory is not always reliable. But a simple system like this can help us gain insight, track performance and spot trends in our behaviour. And the simpler it is, the easier it is to stick to. Keep it simple. Be consistent. And discipline will become your nature. Trade safely!