Novice traders are continually reminded of the importance and value of creating a trading plan and just as importantly sticking to that plan, once you have full confidence in it. Thereafter, the trading plan you’ve worked on studiously to perfect, should never be abandoned. It should only be fine-tuned, whilst you perfect your overall trading approach and skills, especially during your initial baptism years of trading education. The trading plan will have many elements, risk being arguably the key element.
However, many experienced traders will contend that, whilst risk management (money management) is a critical element of the 3 Ms required to become a proficient trader – Mind, Money Management and Method, it’s actually method, your trading strategy, that’s the fulcrum and the pivot supporting an overall successful trading career.
Once we accept the 3Ms trading plan elements as crucial to our potential success, and use these three modules as the base from which to build our plan, we can then drill down into each element separately in order to perfect each module.
Our strategy (our trading method), is loosely defined as how we actually trade; what technique we employ to actually place our orders into the market. Whether we trade manually or automatically through a refined platform such as MetaTrader, the rules and approach regarding the method we employ should remain steadfast. However, with micro adjustments we can strategise our strategy.
We can break our trading method/strategy down into smaller elements, for example, firstly we’ll need to identify what type of trader we want to and can be; position trader, swing trader, day trader or scalper. This decision will be underpinned by the amount of time we can dedicate towards trading.
It’s a general rule of thumb that when you initially discover trading, the less time you have to dedicate towards it, the bigger the time frame you’ll work on and trade off. Position trading could be regarded as a method of long term forex investing, by investing in currency pairs as opposed to, for example, buying a stock market index tracker.
What currency pairs and how many we trade, would possibly be the next question we have to address. Generally speaking, certainly as novice traders, we’d trade the major pairs only given they offer the best spreads, experience less slippage and therefore deliver more accurate fills, due to their high liquidity levels.
The next question could be what technical method will we use to trade; will we use an indicator based strategy, attempt to become an expert on reading price action, use a two moving average cross over strategy (one fast moving EMA, crossing one slow moving MA), use technicals only, or a combination of technicals and fundamentals?
Once we arrive at decisions regarding what type of trader we’ll be, what pairs we’ll trade and what overall trading method we’ll employ, it’s then time to drill right down into the detail which we’ll simultaneously record in our trading plan, as we begin to strategise our strategy by fine tuning certain elements.
If using an indicator based strategy we might want to consider adjusting the settings on the indicator from its default, we may want to consider the time frame we’re trading on/off, we may wish to add (or subtract) an extra momentum, or oscillating indicator. We may wish to reduce our risk per trade to another decimal place. We may wish to add a dynamic trailing stop, as opposed to using a simple hard stop. We may wish to adjust where we place our stops, by applying a different quantitive method.
There are multitudes of ways we can fine tune our actual method and we’ve only highlighted a few ideas here. We should never be complacent, we should always remain open minded, we should always be vigilant to micro adjusting our proven working method and overall trading plan, as market conditions change.