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A common trait among successful Forex traders is the fact that almost all of them trade with a plan.
Basically, a Forex trader operating without a plan has far more in common with a gambler than with a serious trader.
The benefits of trading with a plan are numerous, but primarily it allows traders to overcome the influence of their emotions and trade more objectively and rationally.
Why Have a Trading Plan?
Trading without a plan in the Forex market is like attempting to row a boat without oars. Experienced traders will first have a plan and then do their best to stick to it. As the well-known Forex market maxim goes, “plan your trade and trade your plan.
Essentially, having a good trading plan could mean the difference between success and failure in the trading world. A comprehensive and easy to follow trading plan — containing directions for the appropriate course of action for any and all possible trading situations that may arise will greatly enhance just about anyone’s trading performance.
A good trading plan allows a trader to make trading decisions based on pre-determined objective parameters. This saves the trader from relying on hunches, gut feelings or emotions.
Advantages of Trading with a Plan
By having a straightforward, objective and comprehensive trading plan, a trader can benefit considerably since they can literally “plan their trade and trade their plan”.
One of the biggest advantages of trading with a plan consists of being able to let go of emotions. Trading based on emotions can be especially detrimental to a trading account and usually getting emotional during trading is a recipe for disaster.
Thus, most successful traders avoid trading on emotions like the plague because they know that once emotions take over, you can just say goodbye to the account in most cases.
Instead, they aim to develop a set of criteria for initiating and exiting trades. This planning process takes a lot of the guesswork out of trading and leaves the trader’s mind free to do additional fundamental market research and technical analysis.
Basically, trading with a plan in the forex market makes up the most prudent approach to trading in this sometimes very volatile financial market.
Trading Plan Content
A comprehensive trading plan would typically list the general objectives of the trader, as well as a number of other details about how those objectives would be accomplished during the trading process.
Common Elements of Trading Plans
Among some of the elements that many trading plans include are the technical parameters for initiating positions in the Forex market, as well as the market conditions suitable for exiting the trade, either for a profit or to limit losses when trades go against expectations.
Most trading plans also include a position sizing technique and a minimum risk/reward criteria for each trade that will be taken. These elements ensure that the trader can trade the market without drawing down his account excessively on unprofitable positions or a string of losses.
Ideally, the trading plan will account for every type of market eventuality and condition, leaving nothing to surprise the trader. Stop loss parameters for limiting risk and how to place trailing stops on profitable positions should also be clearly delineated in the plan.
Trading Plan Essentials
Trading plans must contain a minimum of information and structure in order to be easily followed by the trader. Some of the more important elements which should be included in just about any trading plan consist of the following:
While the above suggestions represent some of the essential elements in a trading plan, many more elements can be incorporated depending on the trader and their chosen trading style. Keeping and reviewing a trading journal detailing all trading activities can also provide helpful feedback for traders.
- The amount of capital to be invested
- The size of each individual trade in relation to the size of the account
- The amount of risk taken on each trade as a percentage of the account
- Risk and reward expectations for each trade
- Type of trading system
- Exactly how the criteria for initiating trades will rely on fundamental and/or technical analysis
- Where stop losses will be placed and the maximum allowable loss for each trade
- Criteria for taking profits
- Strategy for protecting accumulated profits
Essentially, each trading plan is as individual as the trader applying it, and no two traders will trade in exactly the same way.
What to Include in a Trading Plan
Ideally, a trading plan should be easy for the trader to follow and provide guidelines for different market scenarios that could possibly occur.
Any trading plan should include details about how to perform position sizing calculations suitable for the size of the account in relation to the trading strategies used, as well as the maximum risk that will be taken on any given trade.
Some trading strategies will not have a higher stop loss than 40 pips while others will regularly use stop losses of 200 pips or more, hence, the same approach for position size calculation cannot be used for both of these strategies.
The plan should also contain a money and risk management component which would limit the amount of risk taken, usually by utilizing stop loss and trailing stop techniques for limiting market exposure and protecting profits.
Furthermore, the plan should set clear goals for the returns on the account over a certain period of time, usually, this is a period of 1 year. Minimum risk reward ratios for each trade taken could also be determined as part of the trading plan.
Setting Goals in the Trading Plan
Knowing your goals before you begin trading and having a clear idea of how to achieve them is the main purpose of having a trading plan.
You generally cannot achieve a goal without first setting one. Therefore, take the time to figure out how much you plan to make from your trading activities and what steps you are prepared to take in the realization of this goal.
Overall, having a well-defined and objective trading plan and a clear idea of what you aim to achieve through engaging in the trading process will greatly enhance your chances for success over the long term.
Barriers to a Successful Trading Plan
Several things could stand in the way of a successful trading plan, but probably the biggest among them is the trader himself and his emotions that may cloud logical reasoning when trading.
Essentially, once emotions take over the trading process, it’s only a matter of time before losses start to outnumber and outweigh gains. Halting trading activities completely and taking a rest from trading when found in such a downward emotional spiral is one way that a trader can pull himself out of the situation.
The Importance of Discipline When Trading
The number one cause for the failure of what would otherwise have been a successful trading plan consists of the trader’s loss of discipline when implementing it.
A loss of discipline can have the trader stay in losing positions without getting out, thereby disregarding their trading plan and trading instead by the proverbial “seat of the pants” method that is famously unsuccessful in the long run.
Sticking to the trading plan no matter what happens is a quality of professional and profitable traders.
Emotions and Why They Must be Managed When Trading
The main emotions that arise during the trading process which can stand in the way of a successful trading plan, as well as affect the markets in general, consist of the following:
- Greed Whenever money changes hands, this emotion can probably be found, especially in the financial markets. People often have no idea how greedy society has conditioned them to be until they start trading.
- Fear The biggest fear driving the market is that of losing money. Pretty much anyone involved in trading will have an inherent fear of losing money, which can lead to serious complications when trading.
- Hope This emotion can be disastrous to a trader that hopefully insists they are on the right side of the market despite a losing trade obviously proving them wrong. Holding on to losers in the hope that they will eventually become winners usually only serves to make the trader poorer over time.
When trading for success, remember to make sure that these emotions do not get in the way of you sticking to implementing your trading plan.
