Core Trading Plan Concepts
It’s easy to jump in to things and learn as you go, learn from your mistakes, think you know what you are doing long before you actually do, but when it comes to Forex you don’t want to lose your risk capitol during the learning process. Feel free to dive in and make mistakes on a demo account, learn the ins and outs, just don’t jump the gun on going live. It’s actually a very common mistake and the reason for the ‘95% fail’ statistic that you see everywhere. Imagine really starting to figure it out and not having any money to play with! This is why a solid trading plan is a must. Swallow your ego because it doesn’t matter how smart you are, you will not succeed without plenty of preparation work. Below is an example of all the things you should have considered in the development of your trading plan; I will be defining everything in this article for example purposes only.
Building Your Trading Plan:
(I write this assuming that you are clear on the extreme basics of Forex. If you don’t understand any of the words in this article please grab your Free EFX Membership here and read my free eBooks)
Before you enter a trade you need to keep in mind that you are always going to be following a simple risk reward rule such as 1:2 as an example. Simply put; you will only enter a trade where you plan to gain twice as much as you will be risking. Furthermore you will be following a money management rule to protect your account and limit how much of your account you will risk on any one trade. An intelligent example here would be to limit each trade to risking between 2-3% of your account. To be able to judge risk reward and follow your money management rule properly you now need to be able to pre-plan your entry point into a trade and where your stop loss and take profit will go.
In order to pre-plan an entry in to a trade you need two things; firstly you need to determine a price point, or location, and secondly you need to determine an entry trigger. When it comes to choosing your location you will most likely be considering support/resistance areas being retested. Your entry trigger may be a specific candle pattern and therefore in this example you would be looking for your chosen candle pattern to be occurring at the retest of a solid looking support/resistance area. This is just an example but the important thing is that you have developed rules behind how you will determine the location that you will be looking for an entry trigger, and also rules behind what you will actually use as your entry trigger.
Now that you have location and entry trigger rules you need to make a rule for where your stop loss and take profit will go, also at what point will you move your stop loss to break even, if any. To continue on with our example of a specific candle pattern at an area of support/resistance, you may conclude that your stop loss needs to go below/above the support/resistance area you are trading. You may then decide that you will let your risk reward rule take care of your take profit and any opposing support/resistance area may be where you wish to move your stop loss to break even.
Having made all of these decisions you now know what you are looking for in order to enter your trade, you can judge your risk because you have a rule as to where you will place your stop loss, and you are therefore able to determine your risk reward, take profit and follow your money management rule. Now you have what is starting to become a complete trading plan and it is time to test it.
So, one more summary within this summary:
– Rule for choosing the price area/location you will trade
– Rule for what entry trigger/s you will use at that location
– Rule for how you will place your stop loss
– Rule for how you will judge your take profit (may link with your risk/reward rule)
– Optional Rule for when/why you will move your stop loss to break even
– Rule for money management and risk/reward
If you are interested in my advice; try to focus your trading plan purely around price action and not any squiggly indicators or moving averages. Price action concepts are easy to back test just by scrolling through historical data. You can use back testers, such as the one built in to MT4, to test trade a year of data in a matter of days. When the market is open you can also trade your plan in a demo account in real time. What is important is to make sure that on average your trading plan is getting the amount of trades per week, or per month, that you desire. You also need to make sure that every time you are about to enter a trade you had rules in place to pre-plan every single element of every single outcome that the trade could have. That is a solid trading plan.
Here at ElectroFX I teach my members how to trade keeping all of these things in mind. After years of effort I have even developed an Organic charting system that allows you to adapt to the market’s volatility whilst still following all of the exact same rules. It is beyond the scope of this article but certainly worth a mention.
A summary of all the ‘Common Mistakes’ articles:
Maintain discipline and follow your trading plan exactly. If you created a complete trading plan considering all of the above mentioned elements and tested to make sure there were no holes, then you will have no problem with confidence in the fact that it works. There is no way that you can overtrade if you are following your plan and all that is left is that you remain patient and wait for the correct setups that you have pre-defined. This way you will have accurate results to analyze and your confidence will continue to grow.
Exit your trades based on your rules and you will not be exiting too early. Risk reward was considered so you never need make that mistake. Do not get emotional when you lose, no one is out to get you and nobody can win 100% of their trades anyway. Accept the loss as part of winning and move on to the next trade.
You can read more details using these links (in no particular order):
Common Mistakes: Trading Scared