Alexander Elder primarily insists on the idea that exchange trading must follow a well-prepared plan, written down on paper or an electronic device. This trading plan must contain the algorithm of all your actions: when and at which conditions to place an order, where to place a Stop Loss or Take Profit, when and at which conditions to transfer the position to the breakeven, and what to do if things go wrong. Elder assures us that this is necessary not just for being well-prepared and making only wise trading choices, but also for being able to analyse the quality of your plan upon closing the trade. Dalai Lama once said something like: When you lose, do not lose your lesson.
One acquaintance of Alexander Elder used to trade miscellaneously for several years, and then his trading results started improving stably and rather fast, which ended in his getting on the list of the best US traders. Elder asked him what had changed in his trading so that his results improved so much. He explained that he had taken up to evaluating his market activity related to how well he could follow his plan.
Mike Bellafiore, an intraday trader with 26 years of experience, a co-founder of one of the most successful prop-trading companies in NY, a coach for young traders, writes in his book One Good Trade that in his company no trader may let themselves make a single trade without a plan.
So, Alexander Elder goes as follows. You analysed the market situation, wrote a plan for your market trade in any financial market, went by your plan, and closed your position. However, the trade is not over! The time has come to analyse your trade and learn some lessons. Elder notes that, regardless of the obvious necessity of the process, many traders simply start looking for conditions for the next trade, thus jumping over the most important step of their becoming an expert — evaluation and analysis of market actions.
To analyse your trade duly, Elder recommends answering the following questions:
- Did I find a good entry point?
- Which indicatora in particular I opted for to do it?
- Which indicators did not work perfectly?
- How successfully did I manage to open my position?
- Did I place my first Stop Loss correctly: not too close to or far from the suitable level?
- Why, Elder asks, could this happen and how bad was it?
- How did I take it to the breakeven: too late or too early?
- Did I protect my profit successfully while the price was nearing the TP?
- Did I get correct market signals to leave the position?
- What would I like to change in the process of the trade?
Such Elder analysis after each trade is a good way to prevent emotional chaos that is inevitable when one has no trading plan and never analyses its completion.
Elder recommends asking your own questions to evaluate your trading strategy in Forex, futures, or the stock market. All this is a chance to learn from your own experience. It is vital to have a trader's diary, and Elder advises to make screenshots every time you open a position, specifying your view of the trading situation and the reasons for selling or buying the instrument. And always write down your market game plan to not get caught into a constantly changing market trap.
Leaving a market position, make a screenshot again, specifying directly on it or in your trading diary the motives of escaping the market, enumerating correct and incorrect trading decisions. Elder states that doing like this, you will have a well-written story of your market analyses, trades, and logics of decision-making. It will help you learn from your past, see the imperfections of your thinking, and avoid them in future.
For your diary not to be a useless burden, Elder insists on constant analysis of your log. Before each trading day starts, look through the screenshots of good and bad trades with all your actions written down on them, so that you could avoid your past mistakes and repeat your success in similar market conditions.
This article was written by Andrey Goilov, RoboForex analyst.