There is one thing all professional traders have in common and that is they all have a trading plan.
The reason a trading plan is so important is because the plan is what a trader uses to make their trades, manage their trades and take profit out of the markets systematically.
A trading plan is just like a rule book that includes all the information on how a trader trades. Having a solid trading plan will ensure you are consistent in you trading and follow your rules – or not.
Trading Forex is very different from every other job in the world because there are no rules. There is no one telling you how much to trade, when to trade or how to trade. Rules are very important to a trader because without them they are just another gambler.
Another way to think about a trading plan is a business plan. The plan outlines how your business runs and operates.
What Should a Trading Plan Contain?
A trading plan and rules needs to cover every scenario you are likely to encounter when trading.
The way you need to think about your trade plan is; if a family member of yours that does not know about your trading had to step in and manage a trade for you that you already had open and all they had to go off was you trading plan, could they do it?
Would they have a clear rule set that states exactly what course of action should be taken under each different set of circumstances? That is what your plan should do. It should be clear cut. A rule set that clearly sets out your edge in the market and exactly what that edge looks like to you.
These things include what you trade, how you trade and how you manage those Forex trades. Also other super important parts of the plan you do not want to forget to include are how much you will risk per trade and what your goals are.
Trading plans can act as check lists. Whilst you have your overall larger plan, you can have smaller checklist around your trade station to ensure you stick to your trading edge. These can be to remind you and help you stick to your rules.
An example of one of these checklists may be for the pin bar. For example;
➜ Pin Bar Reversal
- Will Only trade with the trend or in range. (I will not trade against the trend until profitable 6 months with this plan).
- Must form at the correct swing high or low.
- At a significant pullback such as logical Support or Resistance area.
- It must stick out away from price.
- It must form with open and close within previous bar.
- It must have nose 3x size of body.
- If pin formed in range it must be from extreme high or low of range and not in the middle.
- Must stick out and be large and obvious.
You could make one of these quick checklist for each setups or ‘trigger signals’ you enter to help ensure you stick to your overall larger plan and rule set and continue checking in regularly with your plan and rule set.
Trade Management – The Real Holy Grail
Once you have a checklist for what signals you are going to take you will need to include in your plan how you manage your trades. This is one of the most important points. As I said above; the Forex market has no rules. When you are in a trade there is no one to tell you when to take profit or when to cut your losses. This is a must in your plan otherwise you will get into trades and have no idea how to manage them.
Whilst it is very important to have your trade check list in your trading plan, you have to make sure you don’t forget the other important things. These are the sorts of things such as:
- Money management used
- How much you will risk per trade
- How will you place stops
- How often will you monitor trades
- What you are going to use to target profits
- Trading goals
The basic rule when writing your trading plan is if you are going to come across it in your trading, it should be in your written plan. The more details you cover in your plan, the more consistent your results will be.
Write it Down and Follow it!
A trading plan is no use unless it is written down. Having your plan in your head is a waste of time because when it comes to the crunch and you are under pressure you will forget or go with what your gut is saying. Write out your plan and stick it beside your trading area or computer. Have it on you at all times when trading!
After you have a plan the key is to follow it. I know this sounds simple but many traders write a plan with the best intentions and then at the first hurdle they fail to follow it. An example of this is a trader has written in their plan not to trade against the trend. A Pin bar then forms but it is against the trend. The trader will take this trade thinking to themselves, “I will just take this one setup as it looks so great”. They will then watch it as it goes onto to be a loss. They will then kick themselves for not following their plan. This is a very common problem. Plan your trade and trade your plan! Always!
Give Your Plan a Chance to Work!
The other common mistake traders make is throwing their plan out at the first losing trade. What often happens is a trader will make a few winning trades and then experience a loser. They will then forget all about the plan and move on.
You need to let your plan work out over many trades. The best way to think about your plan is how a casino thinks about their business. The casino knows that they will lose money here and there. What they work on is the fact that over many gamblers playing many games, they will make more money than what they lose.
They may have a few losses in a row but by following their business plan they will come out on top, they know they have an edge built in to all of their games and that this will play out over a large sample size.
Having a sound price action trading plan is your edge and only a lack of patience and discipline are your enemies.
You need to give you plan a chance to work out. Don’t throw it away after one loss! Think like a casino.
More Trading Lessons On Forex Trading Plans