When you’re a novice trader you’ll be continually reminded and encouraged by your mentors and fellow traders to create a trading-plan. There isn’t an accepted blueprint for a plan, although there are a set of generally regarded rules most traders would agree are essential to be embedded in the plan.
The trading-plan should be so highly detailed and precise that it covers every aspect of your trading. The plan should be your ‘go to’ journal which should continually be added to and revised. It can be simple and factual, or it could contain a full diary of your all your trading activity, right down to each trade you take and the emotions you experienced during your early trading period. Before you consider trading here’s a few suggestions as to what should be in your plan.
Set your goals
Set our the reasons for trading; why are you trading? What do you hope to achieve, how quickly do you want to achieve it? Set yourself a target to become proficient before setting a target to become profitable. You have to familiarise yourself with many aspects of this highly complex business before you can begin to target account growth.
Establish your risk tolerance for both individual losses and total account drawdown
Risk tolerance can be a personal issue, one trader’s acceptable risk can be another’s anathema. Some traders will only be prepared to risk 0.1% account size per trade, others will be entirely comfortable with 1 to 2% risk per trade. You can only decide what risk you’re prepared to tolerate after you’ve engaged with the market. Many mentors refer to the sweaty palm test; at what risk level do you experience no raise of heart rate or anxiety when you place and monitor a trade?
Calculate your risk of being unable to trade
Whilst you may fund your first account with a nominal amount, there will be a level of loss, due to leverage and margin requirements when you can’t trade due to your broker’s and market restrictions. You must also reference your initial account funding to your level of savings. For example, are you risking 10% of your savings to attempt to learn how to trade forex?
Record and analyse all the backtested results of the strategies you’ve tested
You will experiment with many individual technical indicators, you will also experiment with many clusters of indicators. Some experiments will be more successful than others. Recording the results will help you establish which style of trader you should be. You will also, through a process of elimination, determine which strategies are more applicable to the various trading styles you may prefer.
Create your trading watch-list and begin to decide why you made these choices
You need to decide what securities you’ll trade before you commit to live trading. You can adjust this watch-list at a later date, you can add or subtract from it depending on how your strategy works during live trading after a test period. You must establish if you prefer to trade major-pairs only, or perhaps you may develop a signal strategy whereby if the signals chime and align on any of the securities in your watch list you’ll take the trade.
List the principle ingredients of your profitable trading system
It’s essential that you break down your overall strategy into all of its constituent parts; the securities you’ll trade, the risk per trade, your entry and exit parameters, the loss per day circuit breaker and the drawdown you’re prepared to tolerate before considering changing your method and strategy etc.