Friday, January 22, 2016

Do You Have A Detailed Action Plan?

It is important for investors to understand what they do and don't know. Learn to recognize that you cannot possibly know what is going to happen in the future, and any investment plan that is dependent on accurately forecasting where markets will be next year is doomed to failure.

Barry Ritholtz
Anything we do well we do from a subconscious level without thought. Driving a car is an excellent example of subconscious operation. When we need to stop or accelerate quickly, change lanes, or make a quick turn we don't think about it we just do it.

It wasn't always that way. When we first learned how to drive we deliberately thought out and planned every move. At first you needed to consciously and deliberately perform each action over and over. Over time and with practice you learn to perform each task with more skill and eventually with hardly any thinking at all. 

This learning process is true in most facets of life. We learn through repetition or practice. Despite intuitively understanding this, many new traders think they can trade on the spur of the moment, instead of carefully planning a trade or investment, while following a detailed plan. Detailed plans are an essential ingredient for success. Lacking the necessary experience a novice trader/investor may find it difficult to trade on the spur of the moment. 

With too many issues to attend to you are bound to make mistakes. 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. If you have not previously done so it will be a great exercise to write the following as part of your plan:
  • If market condition A happens;
  • And stock condition B happens;
  • And chart pattern C appears;
  • Then I should enter: (A partial position? A whole position?)
  • At the market or put buy stop Z into affect.
  • Then I will set my protective stop and monitor this trade until an exit occurs.
Elaborate as desired and/or needed! Knowing when, where, and how helps 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? During studies on making specific action plans, Dr. Gollwitzer argues "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. Secondly, research "people respond quickly when they have a plan to follow. Thirdly, when people have a plan, they can effortlessly ignore interruptions and distractions. They are able to more easily focus on the task at hand, maintaining self-control." If you have a clearly defined plan you will be ready to respond efficiently when the proper and optimal conditions arise. We respond not only swiftly but confidently when we have a plan. If you want to trade/invest like a winner make a detailed plan and follow it!

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