Plan the trades and trade the plan
How often do we read or hear this title without really contemplating the full meaning? It's become such a glib and over used phrase in our wider industry that most traders, (particularly those new to the industry), fail to realise the full impact of the phrase or the necessity of having a plan and moreover the crucial aspect of sticking to it. We'll dilute the trading plan into the most essential and crucial constituent parts and at the footer of the article there'll be a link to a template created by an industry contact of mine, Tim Wilcox, who went to great lengths to prepare and share with fellow traders a superb trading plan. Tim has added to and refined this plan since he began composing it in 2005.
Trading plans are highly personalised documents. This can render fixed templates (created by others) difficult to work with. A template is by nature rigid and fixed to someone else's views, needs and goals, as such it's a personalised interpretation. Therefore it can impose personal limitations on traders. There could be elements within our overview, or the PDF doc template, which you may wish to overlook or discard. However, we'd recommended it as a starting point particularly if you're relatively new to the trading industry. Take the main parts and then personalise your plan to match your choices. A plan should not be altered while you're trading, but subject to re-evaluation once the market has closed. It can and should evolve with market conditions and adjust as the trader's skill level improves. Each trader should write their own plan, taking into account their personal trading styles and goals. Using someone else's plan does not reflect your trading, that's why a template is just that, a canvas of sorts for you to 'paint by numbers'.
What is a trading plan?
Think of it as a business plan, we are after all self employed traders running our own micro business. If you were to approach a bank, lender or other backer for funding your new start business, or for increased facilities, you wouldn't even get a hearing unless you did them the courtesy of supplying a comprehensive business plan. So why not apply that same level of respect to both yourself and your market place? Or why not put yourself in the position of a lender and honestly appraise whether or not you'd be prepared to lend to a guy who hasn't demonstrated whether or not he; knows his product, his industry, has effective money management controls in place, can do basic accounts..A business plan should contain your aims, motives, goals, you should also have projections, a profit and loss statement, an opening balance sheet and a current state of affairs.
A trading plan can be regarded as a set of rules governing the trader’s efforts to be successful in his or her new venture, trading the markets. It can encapsulate everything the trader is seeking to achieve and how he/she will go about trying to make it happen. A plan provides a trader with a mechanism to measure their performance on an on going basis, the plan can highlight milestones on the trader's journey.
A thorough trading plan can allow the trader to automate their decisions. Trading can be an emotional business venture. Emotions can cause a loss of control, trading plans can help to eliminate emotional decision making. A plan can help traders identify performance issues. For example, if losses are being incurred outside the scope and pre defined parameters of the plan then there are only ever two possible reasons. The plan isn't being followed, or the trading system isn't right and requires modification.
Ten Out Of Ten – the Ten Crucial Aspects To Your Trading Plan
1 Skill assessment; are you genuinely ready to trade? Have you tested your trading system using demo forex accounts and have you developed absolute confidence that your strategy works?
2 Mental preparation; you must be emotionally, psychologically and physically ready to trade the markets. Once again this relates to the self respect and market respect you must develop in order to be successful. Think of those people we know who choose alternative lifestyle professions such as writers of novels. They'll still be highly disciplined individuals, often working long hours, working to strict deadlines and being completely absorbed in their latest project. Or consider musicians who spend months working on a new album. The secret of success is hard work in all its manifestations whatever profession you're in. You're fortunate if that hard work is something you really enjoy.
3 Setting your risk level; decide from day one how much of your trading balance you will risk on a single trade. It should range anywhere from 0.5% to as much as 2% on a single trade. Exceeding that level of risk is reckless and unnecessary. Then decide on a maximum drawdown level per day, or a maximum series of losses you are prepared to tolerate (in series) on any given day before closing off for the day. You may decide that a five percent loss per day is your tolerance, therefore on a 1% risk model you'd have to suffer five losing trades, perhaps in series, in order to cease trading for the day. These early decisions can be the most crucial to your trading success or failure far more than the trading strategy you employ.
4 Setting realistic goals; before taking a trade which has triggered based on your set up, set realistic profit targets and risk/reward ratios. What is the minimum risk/reward you will accept? Many traders look for a 1:2 risk. For example, if your stop loss is 100 pips at €100 total risk your goal should be a €200 profit. You should ideally set both weekly, monthly and annual profit goals in your currency denomination or as an overall percentage gain of your account and re-assess these targets regularly.
5 Doing your homework; other than scalpers, who may still have a 'feeling' for directional bias, all other traders, particularly forex traders, must be aware of events such as macro economic releases. It cannot be emphasised enough how economically literate successful traders are. Here's a scenario to play with, if you were stopped in the street by a news reporter who questioned your thoughts on today's major economic news announcements, for example, concerning the UK's Bank of England announcing their next round of £75 billion of quantitative easing, could you hold your own? Could you then talk comfortably on the 'linked' Greece situation, the Eurozone crisis, what the impact of oil price and commodities has for the global economy? If not you need to get up to speed and absorb all the information required to make yourself economically literate.
6 Preparing your trading day; your PC and your connection is vital to your business, yet how many of us regularly clear our cache or defrag the hard drive? Set a regular time to take care of routine maintenance. Whatever trading system and charting package you use, ensure you follow a fixed routine pre your session, for example, ensure that major and minor support and resistance levels are visible, check your alerts for entry and exit signals and ensure your signals can be easily seen and detected with clear visual and auditory signals. Your trading area should not offer distractions, this is a business, and distractions can be costly. Set the times of day you will trade, or make a plan that if you're a swing or position trader that you're always 'on message' throughout the day. Most of us have smartphones that can cope with basic charting patterns and all brokers have platforms that are smartphone friendly, there are therefore no excuses not to be in a position to monitor and adjust your trades.
7 Setting exit rules; the majority of traders make the mistake of concentrating most of their efforts in looking for buy signals based on their set up but pay very little attention to when, where and why to exit. Most traders cannot sell if they're in a losing trade, our inclination is to avoid taking losses. Moving past this is essential to making it as a trader. If your stop gets hit, it doesn't mean you were 'wrong', instead take solace from the fact that you followed your plan. Professional traders can lose more trades than they win, but by employing judicious money management and thereby limiting losses, they ultimately make profits.
Before taking a trade, you should know where precisely where your exits are. There are at least two for every trade. Firstly, what is your stop loss if the trade goes against you? It must be written down and or manually input on your charting package. Secondly, each trade should have a profit target. If price reaches that target either close out or sell a proportion of your position, you can move your stop loss on the remainder of your position to break even. As discussed in number three, never risk more than a set percentage of your account on any trade.
8 Setting entry rules; exits are far more important than entries. Your system should be 'complicated' enough to be effective, but simple enough to facilitate immediate decisions. Perhaps you need three conditions to be met in order to take a trade, if you have more than five hard conditions that must be met (and many other subjective ones), you may find it difficult if to execute trades. Think like a computer. HFTs and algos make better traders than people, which explains why nearly 70% of all trades on the New York Stock Exchange are now computer-program generated. Computers and the software don't 'think' or have to feel in the right frame of mind to take a trade. If the pre determined conditions are met, they simply enter. When the trade goes bad, or hits a profit target, they exit. Each decision is based on probabilities.
9 Keeping records; traders must be good record keepers, if you win a trade then know exactly why and how, the same applies with losing trades, don't repeat unnecessary mistakes. Writing down details such as; targets, entry, the time, support and resistance levels, daily opening range, market open and close for the day, and brief comments as to why you made the trade and any lessons learned can prove to be invaluable. Saving trading records so that you can re visit and analyse the profit/loss, draw-downs, average time per trade and other important factors is essential, this is after all a business and you are the book keeper.
10 Performing post-mortems; after each trading day, adding up the profit or loss is secondary to knowing why and how. Write down your conclusions in your trading journal so that you can reference them later.
Successful demo trading will not guarantee that you will have success when you begin trading real money once the emotions affect your decision making. However, successful demo trading does give the trader confidence that the system works. In trading there is no concept of winning without losing. Professional traders know before they enter a trade that the odds are in their favour or they don't take the set-up. Traders who win consistently treat trading as a business. While it's no guarantee that you'll make money, having a plan is crucial if you want to become consistently successful and survive in the trading game.