What is a Trading Plan?
A trading plan is a set of rules that covers various aspects of your trading life. Traders with a plan will trade better than those without. The old saying in business “Fail to plan and you plan to fail” applies here. The traders with a plan can enter into the markets with better ideas of their own personal psychology, style, strategy and goals. The plan allows them to monitor their performance, evaluate their progress, and trade more objectively – with less emotion and stress. It provides a set of rules to keep them focused in the right direction, which is to be consistently profitable. A good plan strictly adhered to will help minimize losses and stay in the game longer.
Developing a Trading Plan
Developing a trading plan facilitates your decision-making by helping reduce the influence of your emotions from the equation so that you can trade more efficiently. It helps you become more like a cool and calculated trading robot (your trading decisions and actions calibrated to the “code” of the plan) instead of an egoistic, emotional, and stressed trader flying by the seat of his pants, making faulty, irrational judgments in the heat of the moment. If you trade with an automated system or EA, which incorporates much of your plan within its own customized algorithms, then you probably do not need to follow a trading plan as much as code it within the EA. A trading plan is a way for manual traders to become more like highly sophisticated, adaptable trading machines; and with time and experience, perhaps even better than any trading robot because of the greater computing power and adaptability of a human brain.
It is important to differentiate a trading plan from a strategy. It is easy to confuse the two.
- A strategycovers things like entry, exit, managing the trade, money management.
- A trading planis like your business plan, covering your mindset, strategy, trading routine, goals, rewards, and emergency actions. It keeps you focused.
A good trading plan should be solid and fluid at the same time: it should be written in stone while you are trading, but subject to re-evaluation after the market has closed. It should evolve and change with the changing market conditions as well as to the new ideas, skills and knowledge of the developing trader.
What Are The Primary Features of developing a Trading Plan?
Trading plans need to be simple as it makes it easier to follow and simple approaches have proven to work over time. Here are five important features necessary for developing a trading plan:
- Trading Mindset
- Trading Goals
- Trading Risk and Money Management
- Trading Strategy
- Trading Routine
We will go over each one with a bit more detail, some questions asked of each one, with some example answers.
Trading mindset represents the self-assessment of the trader regarding his particular mental attitude towards trading, his emotions during trading, his space and time for trading, and his strengths and weaknesses. Let us break these down into questions, which we will later follow with an example.
There are many reasons for becoming a trader, and making money is common for all, but it is important to know your financial targets. Setting goals is an important part because it provides you with a beacon to work towards, the ability to track your progress and the motivation to work towards.
Trading Risk and Money Management
Risk management focuses on the risk of each trade, the risk-reward ratio, winning probability, and position sizing. Depending on your account, the pair and the risk you accept per trade, you should be able to calculate the exact size of the position you should use for the trade. Money management, on the other hand, focuses on initial lot sizing in relation to account size, and how it increases and decreases as the account grows or falls.
The core of the plan is the strategy, which consists of the entry and exit rules. Most strategies fall within three groups: trends /breakouts, retracements, and reversals. A setup is the set of characteristics that help you identify the right conditions for a trade, and a signal is a specific condition that is met that triggers your trade. Both entries and exits can have setups and signals. We will be looking at both.
Having a routine in place is a way of reviewing progress and ensuring discipline. Your brokerage statement will be logging all your trades, but you should be reviewing and keeping notes for each one. It is vital to keep track of your past trading in order to recognize past mistakes and avoid them in the future.
The Bottom Line: Developing a Trading Plan
Trade your plan consistently. You can make modifications to improve its performance, but be disciplined in your approach. Remember that some Forex trading broker has dedicated account manager for traders who is willing to help the trader to form a good trading plan. If you are relatively new in this arena, we would like to recommend you to get started with HYCM Broker, they provides a dedicated account manager for traders on a region basis. Learn more on this broker from HYCM Broker Review.
Remember, you should be executing your personal trading plan through a demo account prior to using real money. You will then see how it works, iron out any bugs, and fine-tune your entries and exits before risking a single penny. You should have done some back testing on the strategy and plan, but do not rely on only that. There is no sure way to properly back test a manual trading system–for the eye and human bias can play tricks on you. You should trade your system in a demo account for a number of months, keeping in mind that the system or plan might need a lot of modification, or be scrapped altogether as faulty, like 95% of them are. Only when the plan has been thoroughly back and forward tested as reliable and consistent should you be looking to trade it with real money.
|Chapter 8||Forex Trading with Real Money|
|Lesson 1||Developing a Trading Plan|
|Lesson 2||Opening a live Account|
|Lesson 3||keeping a Forex Trading journal|
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