Two mentors I had from the trading floor used to tell absurd stories about two [probably fictional] traders, one who had a plan and one who didn’t. I’ll do a quick re-telling of both…
Bob, the founder of The Chart Watcher, used to say he’d regularly see new people try and fail at trading on the floor. He said it was usually because they did not have any plan. This trader would come in every day with some new approach because yesterday’s ‘plan’ did not work. The only thing he said was consistent about this kind of trader was they would be out of capital within 3-6 months.
Then he would say there was one guy on the floor with this simple plan and he used it for decades before retiring. That guy would show up just before the open, buy his full lot on the open, then walk away from the pit. Bob said he wouldn’t see him all day until near the close. Sometime near the close he would show up again and sell his full lot. Every day, same plan – buy the open, sell the close – then retire happy.
Marty, an options trader from the floor of the CBOE, used to tell his students he had two people pitch him for investing opportunities in their trading business. The first trader said he doubled his money last year. When Marty asked him about his trading plan the first trader said he just went with his gut feeling. All of it on feeling, when he should buy or sell and how much.
The second trader told Marty he had a great steady opportunity. Marty also asked him about his plan. He replied he has a plan and he always sticks to it. Every day he would sit at his desk with all of the companies in the S&P 500 in a watchlist. He would steadily click through them, going back to the top when he hits the bottom. He does this while looking out the window to his street. Whenever a UPS truck drove past he bought whatever stock he was currently on in his watchlist. He risked 1% of his capital and took gains at 3%. He would short the stock on his watchlist whenever FedEx drove past. Same entry and exit rules.
Mart said he told them both no, but if he had to choose, he would go with the UPS/FedEx strategy because it was a consistent plan [with risk management].
The point of both stories is to really drive home the idea that you need a plan and almost any plan is better than no plan (you also need to stick to the plan, which many find the difficult thing to do).
Sticking to a plan help a trader in a couple of ways. First, it should help remove emotions. In trading and investing, emotions do much more harm than good. Fear and greed are the downfall of many investors and traders.
Another way in which it can help is in diagnosing what is and isn’t working. If you keep switching you do not get a good sample size on what will help or hurt your profit and loss. But if you stick to a process, you can review the results and test what outcomes you would get if you tweaked one part or another in your process – or plan.