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1. Why a Trading Plan is Vital
Visualize a bar chart of historical prices for a commodity.
If the labels on the x-axis (representing time) and the labels on the y-axis (representing
price level) were covered up, you wouldn't know if you were looking at data for
monthly bars, weekly bars, daily bars, hourly bars, 20-minute bars, or bars for
any other time frame.
In fact, if you had a chart for each of these time
periods, you wouldn't be able to differentiate one chart from another if the axes
were not labeled!
I conclude two things from this:
1. Regardless of time frame, commodity prices demonstrate
similar behavior
(occasionally trend but often chop around in a random fashion).
2. Regardless of one's trade horizon, patience is
a necessary virtue. That is,
markets rarely move straight up or straight down.
So directional traders need to sit through retracements
and patiently await a resumption of the trend while non-directional, volatility
traders need to resist reacting to every market "wiggle" and patiently
await more significant market moves and/or changes in implied volatility.
Of course, that's why a trading plan is so important.
Traders who watch the tick-by-tick moves in a market are prone to reading too
much meaning into what's happening at the moment. It's vital to "stand back"
and define trigger points for action before "getting into the thick of things."
A trading plan provides objective rules for taking
action and, as such, replaces "seat of the pants" (emotional) decisions
to close or adjust positions with rational decisions based on managing risk.
"Knowledge is power and all traders can benefit
by continually bolstering their knowledge base. I hope to contribute in that regard."
Paul Forchione
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