In our everyday lives, we are used to doing things reflexively, on the spur of the moment. For example, we don’t consciously think about making a turn as we drive; we just do it automatically without thinking. But it wasn’t always that way. When we first learned how to drive, we deliberately planned every move. It’s also true when playing sports. At first, you needed to consciously and deliberately perform each action. Over time, with practice, you were able to perform each action skillfully, hardly thinking at all. Despite their experience learning various skills throughout their lives, novice traders, however, think they can trade on the spur of the moment. They don’t carefully plan a trade and follow the trading plan when it is time to execute it. But detailed trading plans are an essential ingredient for success.
When you first start out trading, it is difficult to trade on the spur of the moment. There are too many issues to attend to, and without a wealth of experience, you are bound to make mistakes. Making a specific action plan while trading has clear benefits. Scientific research illustrates how action plans help people achieve their goals. Dr. Peter Gollwitzer, Professor of Psychology at New York University, has conducted several studies that demonstrate the benefits of making specific plans that outline when, where, and how to perform an action.
For example, it’s useful to determine beforehand that when Market Condition X happens, and Pattern Y appears, then you should enter at a prescribed moment, set a protective stop, and monitor the trade until Z occurs. Knowing when, where, and how to help you perform effortlessly and gracefully. Specific plans help us respond quickly and automatically when it is necessary. When we make a plan beforehand, we can follow it, acting swiftly and efficiently.
What does research on making plans reveal? In a review of relevant studies on making specific action plans, Dr. Gollwitzer argues that plans allow people to more easily remember what to do specifically. They don’t waste time trying to recall what it is they are going to do. They have decided what to do, and when, beforehand and have little trouble doing what they had planned. Second, research has shown that people respond quickly when they have a plan to follow.
If you have a clearly defined plan, you are ready to respond more efficiently when optimal market conditions arise. Third, when people have a plan, they can more easily ignore interruptions and distractions. They are able to more easily focus on the task at hand, maintaining self-control. Action plans are especially useful when trying to respond during high-stress situations, such as during a day when the market action is hard to pin down. Trading the markets on an especially chaotic day can be stressful. A series of decisions need to be made on the spot. But the human mind has limitations.
We can only attend to a limited amount of information at a time. A detailed trading plan, however, allows us to focus our limited psychological energy more efficiently. We respond swiftly and confidently when we have a plan. So if you want to trade like a winner, make a detailed trading plan and follow it. You’ll be glad you did in the long run.