Ask Colin

I have been developing my trading plan. When does one know to fix a method in concrete & stick to it?

Arriving at a trading plan that is to be used for the investment of real money is one of the most difficult of al the tasks that a would-be investor has to undertake. In fact, once this is done, everything else should be fairly easy. I think the process will look something like this:

1. Some formal instruction in financial markets, fundamental analysis, technical analysis, money management and psychology.

2. Extensive reading and less formal instruction through seminars etc.

3. Even more extensive thinking about the problems.

4. Serious self-examination, so that the trading plan that is developed is going to fit your personality.

5. Development of draft trading plans that are thoroughly tested on past data and on pare going forward in real time.

6. Refining of the plan until you have something that works, that you are comfortable with and in which you have unshakable faith in when you are under pressure in the market.

7. Experience in actual investing with real money. This will usually result in several iterations of re-examination of the plan and making and testing revisions to it in the light of the experience to date.

8. At some point you will reach the level of "mastery", where you will know instinctively what to do in every situation as the market unfolds.

9. Even so, you should be alert to the possibility that the markets keep changing and this could mean you have to modify your approach. Keep thinking, reading, learning and testing.

Assuming that you think that you are at stage 7, one thing is important. Do not even think of changing, modifying or tinkering in any way with your plan while you are in a trade. You follow the plan, period. You cannot make objective decisions when you have a trade in the market. Your plan is your only defence. Follow it until you are out of the market. Then rethink and set a new plan for the next campaign as described above.

It took me many years to get to this point. My experience and that of others suggests that it takes from 5 to 10 years to develop mastery, depending in part on how much time you devote to the task. The key thing is not to lose too much while you are learning. By the way, most people think they are different and they can skip steps and take less time. The market will charge a high price for such hubris.