Audit a Trading Plan and Find Five Holes

[Fairman]

Audit a Trading Plan and Find Five Holes

Here is an actual-style plan from a trader. "I trade major pairs and sometimes exotics. I risk 1 percent per trade, or 2 to 3 percent when I feel confident. I scalp in the morning and swing trade in the evenings. I use RSI, MACD, and moving averages for signals. If I lose, I take a break."

Find the holes.

One, vague universe. "Major pairs and sometimes exotics" means no list. Each pair has different costs and behavior. Fix: name three pairs.

Two, variable risk tied to a feeling. "2 to 3 percent when I feel confident" is conviction sizing, which the earlier material showed to be dangerous. A single oversized loss could cost 3 percent, and the track record mixes sizes. Fix: a fixed 1 percent.

Three, two incompatible styles. Scalping and swing trading need different stops, sizes, and attention. The results cannot be evaluated together. Fix: pick one style for the first year.

Four, indicators without rules. "Use RSI, MACD, and moving averages for signals" does not say what combination triggers a trade. Fix: write the exact conditions.

Five, no loss limits. "If I lose, I take a break" does not say how large a loss or how long a break. Fix: a daily limit of 3 percent, a weekly limit of 5 percent, and a stop after two consecutive losses.

Also missing: stop and target rules, news policy, review routine.

Exercise: audit your own plan with the same five questions.