There is some “common” wisdom that a trading plan should be simple.

This could not be further from the truth. A trading master plan is the accumulation of years of work trading, observing the market, and learning. It is very intricate, subtle and personal.

I think this misconception about simplicity comes from confusion around the importance of timing the entry price or “stock picking”, if you include the broader spectrum of trading. Many traders think the “what and when to buy” is the trading plan, though it is only a small part.

Yes, your entry rules need to be simple, because complexity is the enemy of decisiveness, and one of the key traits of a good entry is that it enables decisive action in an uncertain environment. But the entry is only a very small part of your trading plan. In fact, it should make up no more than 5% of your plan or your time developing your plan.

In contrast, your trading plan should contain a detailed outline of your philosophy – your trading manifesto.

To be the best model the best

If you search for excellence in any field, you will notice that the top performers do things differently than the rest, and in trading is no different from sport or business.

One of the best is Ray Dalio, founder of the world’s largest hedge fund Bridgewater.

While there are numerous things about Dalio we could explore, one is of particular pertinence to today’s conversation.

In 2011, Ray Dalio released a 100-page manifesto entitled Principles. You can download it here.

Ray Dalio’s Principles

Dalio believes that:

“Having principles that work is essential to getting what we want out of life… [and that] all successful people operate by principles that help them become successful. Without principles you would be forced to react to circumstances that come to you without considering what you value most and how to make choices that get you what you want.”

When trading, every day you are bombarded with thousands of inputs, each of which needs to be construed and assessed for potential impact on your positions. Many of these inputs are difficult to interpret, or cause an emotional reaction that tempts us to do the opposite of what we should (I.e. let losses run, or cut profits short).

Can you see how difficult it is to get what you want out of the markets, if you don’t have principles to guide your actions? Without principles your trading ship is rudderless.

Your manifesto is where you gain clarity on your principles so that they guide your decision making process to give you the best outcomes consistently.

The contents of your manifesto

Your manifesto is not your trading system’s rules, or your model of the market – it is your guiding principles and philosophy about how you approach your trading.

Let’s deconstruct what this means.

A trading plan might have a rule like:

“If the prices hits a support level I buy 1 lot with a 50 pip stop-loss”.

Or

“The profit target for exiting 50% of the position is placed on the opposite side of the range”

In contrast, your manifesto contains statements like:

“I am patient because I know there will always be another opportunity”

“I see trading as an intriguing game, which I play like a ninja: with calm centeredness in the face of adversity”

“I spend a good deal of time reflecting on what I have done right or wrong”

“I don’t try to be 100% right on my entries and exits, so I employ a scale-in and scale-out approach”

“I achieve my goals though position sizing”.

Furthermore, it should delve into the beliefs behind the statement and actions that this will lead you to take.

Let’s take the statement:

“I spend a good deal of time reflecting on what I have done right or wrong”

My belief behind this statement is that if I reflect on what I am doing right and wrong, I will be able to do more of what is right (and working), and less of what is wrong (and not working).

My actions behind this statement are to record every trade I make, and the observations around my trade. I will also spend 15 minutes sitting quietly in introspection at the end of each trading day and write down any observations I have, and if appropriate add them to my manifesto.

Don’t feel limited by an arbitrary limit on the number of principles or beliefs you can include in your manifesto. Actually, the more you explore this the better. Dalio has over 200 principles that grow and evolve as he does in his manifesto.

Constructing your manifesto

Constructing your manifesto is a deeply personal affair. There are no set rules, and there is no set structure you need to follow. What is important is that it resonates with you.

Some common trading wisdom that is correct is that you need to find a trading style that fits your personality. If you are not trading in a manner that is congruent with your core self, you will make mistakes that kill your system and erode your trading self-esteem.

This is why it is so difficult to trade other people’s systems, or even many of the systems you develop for yourself.

I have developed so many systems that don’t perform as well as they should when I trade them, simply because they don’t suit me (even though I developed them). I share this as it was an important insight that I had when I was writing my manifesto. Certain trades of mine produce the majority of my profits and take far less of my time, because they are in harmony with me and with the flow of the market. If I am trading a great system with a positive expectancy that does not suit me, I tend only to break even, because I am struggling rather than in tune with it.

So, make your manifesto your own. Make it a journey into your depths of trading self-awareness, and extract a philosophy that is connected to your ego-less trading core.

Listen to yourself and challenge your presumptions. You may think you know what “cut your losses short” means, but have you truly explored what it actually means to you from multiple angles? An open and creative mind is a boon to a trader, even though that might sound counter-intuitive to some of you.

Where to begin

There is no time like the present to get started (one of my favourite statements, on many levels).

If you are looking for a place to begin, Ray Dalio’s might be a bit tough to get into. I would suggest you read the Market Wizards books by Jack Schwager, and write down the insights from the great traders contained within that appeal to you. Then, start to integrate them into your belief system and manifesto.

Over time, with much market experience, these insights will start to take on more meaning for you and eventually become your own. You might also find the free Advanced Forex Course useful, as the study of the market wizards is how I put it together.

Finally I suggest you focus on self-awareness. Do your best to identify your mistakes and issues that are holding you back and use the manifesto as a framework for solving them.

Over to you…

Cheers,

Sam

About the Author

Sam Eder is a currency trader and author of the Definitive Guide to Developing a Winning Forex Trading System and the Advanced Forex Course for Smart Traders (https://fxrenew.com/forex-course/). He is a part owner of Forex Signal Provider www.fxrenew.com (You can get a free trial). If you like Sam’s writing you can subscribe to his newsletter for free (https://fxrenew.com/newsletter-sign-up).