Creating your trading plan
The positive impact a Trading Plan can have on your Trading Psychology and Discipline
In order to be successful in the financial markets there are many skills and characteristics required. Key competencies involve the ability to understand and interpret; trend, support, and resistance alongside reading various indicators. Conversely none of these are more important than being able to keep your emotions in check and maintain discipline.
Recently I have spoken to a few of you guys that are slightly de-motivated having had a string of losing trades, feeling lost in the world of trading.
How to create a trading plan?
A quote to ‘kick off’ your trade plan;
“Trading is my business. I will always conduct my approach in the market in a professional manner. I have written this plan for a reason! If I am to succeed I must follow it, if not I will fall into the 95% of traders that fail. Success is available to everyone, so why should I settle for being average? I am a winner – why? Because that’s the way I am!!!”
First and foremost a business should never commence without a business plan, and trading is no different. Have you ever heard of the saying, “Fail to prepare, prepare to fail”? Before entering the market you should know your exact entry technique, your management and your exit rules. If you have written a plan then congratulations you are in the minority. I will state that having a plan doesn’t mean guaranteed success, but a plan will help you set objectives and rules of how you aim to get to/and exceed your target goals. If your plan uses flawed techniques or lacks preparation your success will not come immediately.
Once you have put a process in place, it is down to you to go and test the process on historical data. By documenting this process you learn how to avoid repeating costly mistakes. Some very important points to consider in developing your plan. A quote I like “My opinion doesn’t decide a good trading opportunity, my RULES do“
Am I ready to trade? Have I tested the system on historical data to see if it is profitable? Do I know the results of this system inside out? If you know the systems results you should know the longest losing streak, the average winner, average loser, biggest winner, biggest loss, and biggest drawdown. Knowing this information is crucial for your confidence. A trader will always go through difficult periods; it’s at these times you look at your systems results to see if you are still within the risk parameters.
State of mind:
Make sure you are ready to trade. Follow a daily preparation starting by reading your plan every day, and looking at news and the dollar index as we do. Decide if you are emotionally ok to trade meaning no external pressures, i.e. having a hangover or being angry. If this is the case take a day off. Create a daily routine that puts you in the zone to trade!!
What percentage of your account are you prepared to have exposed at any one time e.g. 2-5%? How much of your account are your prepared to have at risk per currency or asset? Intraday traders may consider a daily target which if attained will stay out of the market for the remainder of the day.
Learning new techniques or reading a particular book by a specific date.
Set realistic targets, I would rather over deliver than under perform. This is great for your confidence.
Have weekly, monthly and annual targets, re-assess on a regular basis.
What trades am I already in? Which direction? What exposure do I have in the market.
Are there any major news announcements? What time?
What charts should I be watching? Is it a pivot or reversal etc? There is no need to scan through every chart everyday as you are already prepared.
Where are my major and minor levels of support and resistance?
Target per trade: you may want to set a limit order (take profit) for each trade as it will take emotions out of the management.
If you set something in stone and tell others what your goal is, then if you’re like me, you don’t like to fail in the face of others. It is always best to set small targets en route to a big target. These targets must keep being updated as time elapses; otherwise you’re likely to run around in circles achieving nothing.
Set entry and exit rules:
You should know your exit strategy before entering the market, this is the most important part of your trade. Anyone can enter the market, but through fear and greed not everyone can exit. Make sure you have these rules written down. Remember you have tested these rules, they are not made up.
Entry – this is the easy part, are you a trend continuation trader? A reversal trader? or are you both?. Make sure you define the rules. If you can’t follow your own rules, maybe it is time to stop trading, that’s the harsh reality of trading.
This is imperative, without excellent records you will not become consistent. The journal is for you to review your trades. You need to know which trades you make most money on and why, which trades you lose most money on and why. With this information you can only improve your trading. My journal has a lot of information on; date, time, entry price, stop, target1, target 2, date closed, currency, chart time frame, pips gained, rules followed and comments.
Having a successful paper trading system doesn’t guarantee success due to the fact that no real money is being traded and emotions are not involved. However paper trading does give you the confidence that the system works if you stick to the rules. As you know we have great success with both strategies over a long period of time so respect the rules and play the probability game.