DEVELOP YOUR FOREX TRADING PLAN
Having a Forex trading plan is one of the most important pieces of the puzzle of becoming a consistently profitable Forex trader. Yet for many traders, creating a Forex trading plan can seem like something of a mystery, or perhaps something that they “will do eventually”…
It is this lazy type of thinking that gets many traders into trouble and causes them to blow out trading accounts. Success in the markets is a function of discipline, and most people simply do not have enough self-discipline to determine if they are trading emotionally or objectively. This is where having a defined forex trading plan comes in; a trading plan will act as a guide that will keep you on the disciplined trading path.
Having a written out pre-defined trading plan means you are making an effort to hold yourself accountable to something, this is necessary to forex trading success because there is no one to be accountable to as a trader. You have only yourself to be accountable to when trading the markets and it can be extremely difficult to do the BEST THING FOR YOUR TRADING ACCOUNT when it goes against everything you FEEL like you want to do. This is the entire point of having a forex trading plan; to have a physical reminder of what the best thing for your trading account is at any given time…
The more you push and struggle by over-analyzing market variables the more your trading account is going to suffer, this is one of the biggest psychological paradoxes and hurdles that traders need to overcome before they can realize their full potential as market technicians. This fact is directly related to the concept that patience in Forex trading is rewarded by the market. Patience is one of the best and most important virtues that any forex trader can have. Being patient and waiting for only the “best” price action setups will greatly improve not only your win rate but also your confidence because when you are trading with high accuracy you are naturally going to boost your confidence.
This is all well and fine as long as you can manage to maintain your patience as your winning percentage improves. This may seem a bit counter-intuitive at first but it is one of the biggest reasons that many traders fail to make money consistently and end up repeating the same cycle of boom and bust in the market. The psychology behind this process revolves around the feeling of euphoria or over-confidence that often hits traders as they become more accurate in their trades, which is almost always a result of having patience long enough to wait for a string of high-quality setups.
Being able to recognize this feeling of euphoria or over-confidence and calmly and consciously over-ride it by walking away from your trade station for some time is the best medicine to fix this emotional trading mistake that so many traders make. There are several other strategies you can use to remain consciously aware of the potential of euphoria to sabotage all your trading success. If you need to make note cards and post them on your trading desk that says things like, “Be aware of euphoria after winning trades”, or “Don’t stop being patient just because I had a winning trade”, then, by all means, do it. The period right after a winning trade or a series of winning trades is the exact point in time that separates the amateur traders from the pros. Pro traders are always consciously aware of how they are feeling and whether or not their emotions are influencing their trading activities.
One of the best ways to not let emotions influence your trading activities is to have a defined trading plan that describes in concrete terms what you will do in any given market scenario. Many traders do not attempt to have a trading plan because they aren’t sure where to begin or how to write one. It does not need to be extremely long or complicated to be effective. Essentially the point of a trading plan is to keep you honest with yourself because if you don’t do it no one else is going to. And this is exactly the problem most traders have in the markets, there is no one to be accountable too if you lose all your money, except yourself. You aren’t trading for your boss or someone else unless you are a prop trader, but most traders don’t make it that far because they cannot even be accountable to themselves first.
So what exactly does a high-quality trading plan need to contain? Well, it doesn’t need to be super complicated, as stated previously, the MOST important aspect of an effective forex trading plan is that you can somehow force yourself to USE IT. Tape it up somewhere that you will see it every time you trade, read it every day. I have personally written trading plans in a notebook only to never open the notebook again. Don’t do this, don’t write it down in a notebook, type it up on your computer and print it out if you need to, then place it on your trading desk, hang it on your fridge, whatever it takes so that you READ IT every day.
What are the critical elements of a trading plan?
1. Define your entry strategy. Whether you are entering the market of a reversal pin bar setup in the direction of the trend or off a bounce of a moving average, whatever you use to enter with making sure you can define it and that you know what constitutes a HIGH QUALITY or PERFECT A+ entry from one that is lesser in quality or perhaps a B or C entry.
2. Determine the risk to reward scenario on any potential trade setup before entering it. Also, make sure you have a thorough understanding of Forex position sizing.
3. Adjust the position size the trade to meet the necessary stop-loss distance, NEVER adjust the stop-loss to meet the desired position size, this = GREED.
4. Know what your exit strategy is BEFORE entering the trade, if you are not exiting on a pre-set risk-reward setup, then make certain you don’t tell yourself that you will just “figure it out” as the trade unfolds, this never works. You are never going to be more objective than when you are not in a trade, therefore this is the best time to plan out all trading parameters.
5. After the trade is over, make sure your trading plan includes an activity or some mandatory thing that you do after you have exited a trade, whether it was a winner or a loser. The period right after a trade is one of the most, if not the most, emotionally sensitive period for traders. Feelings of revenge, frustration, and disappointment can cause you to jump right back into the market on a whim, with no real setup present this is likely to cause you even further psychological harm because you will likely lose even more money, and the cycle will continue.
Winning trades also need a period of inactivity once they are closed out. It is very easy to feel over-confident or “in control” of the market after a string of winning trades. What happens next is that traders often enter a trade on a whim again (see the pattern here) but this time they are at even greater risk because they are feeling euphoric and they decide to risk more than usual, only to see all their recent profits evaporate in the blink of an eye.
This article has supplied you with the reasons WHY you need to have a Forex trading plan and some very good ideas about what you need to include in your trading plan. There is no concrete way to make a good trading plan, but the 5 concepts included in this article are a great starting point. Feel free to add any of your ideas or concepts presented in my forex trading course to the outline presented here. Just remember that the whole point of a trading plan is to keep you accountable and to keep you on the track of objective thinking. You should NEVER make trading decisions while you have a trade open, as MOST of the time this will back-fire on you. The best time to make your trading decisions is when you are not in any trades, this is done by creating a logical Forex trading plan that acts as your guide to the market, and this is the only effective way to consciously make an effort at eliminating emotional trading mistakes.
Trading is very risky, do not risk more than 1% of your account.