Warren Buffett says “Risk comes from not knowing what we are doing. We only have to do a very few things right in our life so long as we don’t do too many things wrong.” These words fit so well for trading. Most of the traders are not successful because they don’t have a plan. Their decisions are based on tips, newspaper reports or what their friends are doing. This kind of trading may lead to a couple of successful trades through pure luck but in the long run it will only lead to ruin.
It is not a secret that markets are unpredictable and no one can guess what is going to happen in the future. Do we avoid or stop trading? No. We have to find out a way to trade with minimum risk or with a known amount of risk. There is only one way to do it and it is to study the past trends of the markets. If we decide to trade gold, then we should analyze the past one or two years of the price data for gold and see its behavior. Based on this we can arrive at a plan for trading. Trading based on ‘trend following’ is the best way to trade and the easiest way to reduce the trading risks.
Keeping things simple is the first step in this direction. It allows us to trade without any anxiety, fear, frustrations or anger. These are the worst enemies of traders. Being disciplined, following our trading plan, having complete faith in our trading plan, keeping realistic expectations and being patient will give us consistent results from our trading.
Planning our trades is the beginning. Our plan will tell us when to enter and when to exit a trade. Once we are clear on these points then all that we have to do is place a trade and wait patiently for our plan to tell us it is time to exit. Another fact which we have to remember is there is no trading plan that will give us 100% winners. Every plan will have both successful trades and failed trades. All prudent traders are aware of this fact and they take it in their strides as they believe that over all they will achieve positive returns. They have complete faith in their trading strategy. If we believe that we can control our trading results and can avoid failures then we are in a fool’s paradise.