A Trading Plan – How To Create One

A Trading Plan – How To Create One

Anything Of Worth Follows After A Plan

Professionals like building engineers, surgeons, athletes, etc. all have plans they follow to ensure success in their plied trades. For example, an engineers at a construction site will not build anything unless there’s a plan that guides him on what exactly to do, where and how. Remember he’s a professional who knows his work yet without a plan the chances of success are slim to none as everything would be random. He needs to know the purpose of the building to be able to think for and advise the owner on what might be missing in the plan, and know what exactly to do. Their goal is the completed structure that suits the purpose for which its built. But the plan is their roadmap to the reality of the goal.


Doctors are no different. When it comes to surgeries, they must have a plan that guides their procedures to perfection. They know where to start, how much anesthesia is needed, how deep they should go, how much blood they’ll need, when to put the patient on oxygen, how to deal with critical moments and emergencies. They carry the necessary tools to the theatre to cater for every step in the plan. And they must have a purpose why they have to whatever they are doing


Forex Trading Is A Profession

Forex trading is no different. It’s a profession like any other. As such, for one to be able to trade with long term success they ought to have of how their trading will be. Otherwise they’re gambling. It may not appear so to them with their short term plan-less trading success, but it will soon be clear to them when the margin calls come. Knowing you will buy or sell is not any different from a surgeon knowing they with operate and saw back. Just like a medical surgeon must know exactly how, where and when to operate and how to react to the different outcomes (patient management) to ensure the success of an operation, a forex trader must know exactly what to do, where to place their positions and how to react to the different market conditions and price reaction (trade management). All this has to be… you guessed right – planned or premeditated. It has to be done according to the script as any deviations could be fatal.


In the trading of currencies, without set plans and developed strategies that guide one’s trading it’s virtually impossible to determine one’s degree of success. The vast majority of people do not trade with a plan, so it’s not neither a mystery nor a secret why they lose money. Trading with a plan is comparable to building a business. We are never going to be able to beat the market. In general, it’s not about winning or losing, it’s about being profitable overall. Without a plan trading becomes about the frequency of wins vs losses which takes you nowhere since nothing is predictable, the fact that trading is a probabilities’ game. With a plan however, shift goes from win vs loss frequency to Risk:Reward ratio. This is the golden jackpot of trading.  So now we’ll see what planning a trade really is.


Does Experience Matter?

There is a big misconception that one needs several years’ experience in the markets to be successful. But it’s a fallacy. You see, your several years’ experience might be a painful one. It might be one of failure, traumas, depression all caused by terrible losses incurred while trading that leave your mind scarred. This in turn becomes counterproductive to your trading as it brings emotions into your trading (a very dangerous negative force). This negative wealth of experience leads to doubts, fear, hesitation, all of which are detrimental to your trading goal. This can prevent you from taking a step back and looking at a situation objectively. On the positive side though, experience with the charts is good. One gets to know currency behaviors, chart patterns at a glance, price reactions, etc. The price charts become second nature that an experienced trader can instinctively know at a glance the likely price behavior in different situations giving him a predictive edge in determining market direction and enabling them take trades ahead of the pack.


So the usefulness of experience is relative and varies from one individual to another. That’s not the case with a trading plan. The importance of a trading plan to traders is always the same across a spectrum of trading styles just like surgical procedures are universal across a spectrum of cases. Nothing is random.


Planning Is Serious Work

So putting first things first before engaging in Forex trading, make sure you take time and study the different trading scenarios that could happen to you in the markets.  Do a thorough research and build a plan according to your trading needs. Find confidence in what you know from your own personal experience with the markets. The tools you choose for your tool kit to use in the execution of your strategy are important, including the Time Frame, Chart patterns, retracement measuring tool like the Fibonacci, the indicators (for both trend and oscillation), and the drawing tools. Then test your plan before ever engaging in the real live market environment, test out your plan to build confidence with it by making sure it works. And when you begin trading, continue testing it regularly. This allows you to measure your success by clearly seeing what works and what does not work. From there you can tweak elements that might be weaker and not contributing to your overall goal. Then after have an honest discussion with yourself by pausing yourself questions, the answers to which will help in shaping and completing your trading plan. These answers will later act as a reference board and help to ensure accountable trading. Here are some of those questions:


What Are My Trading Goals?

The settling of this question is important as it helps establish the kind of trading that’s suitable for you. Your trading plan has to be tailored to your goals. If the reason for your trading is to make as much money as you can or become the next millionaire, then you may not be ready to engage in the trading of currencies. That goal might lead you to over leverage your account and over trade, which could see you lose more money than you could dream making

Your goals have to be SMART .  Trading is a business of numbers so the figures have to be specific, you can measure your success, it’s attainable, it’s about trading, and there’s a time-frame attached to it. You should also decide what type of trader you are. Your trading style should be based on your objectives, personality, your attitude to risk, as well as the amount of time you’re willing to commit to trading


Why Of All Forex?

This has to do with your motivation. Find from within yourself what the driving force fueling your desire to trade forex is. Is it the need to be independent? Is it the need for family time? Is it about career change? All these are important in deciding your style of trading that will determine the trading strategy and plan.


What Are My Core Competences?

What exactly do you know about forex? What’s your level of skill? Can you technically analyze the markets or you are better with macroeconomic data? If your competences for example are the reading of raw data from the price charts, then you might want to create a strategy based on price action. If you know how to interpret macroeconomic reports and data, then you may want to add a component of news trading and have a trading plan that combines both aspects of technical and fundamental trading. Creating a strategy using fundamental and technical tools is important, but we first need to learn a little about each of these types. Some traders choose to use fundamental analysis to assist with their trading decisions. This type of analysis is based on the news. News can be considered anything ranging from economic, political, or even environmental events. As a result, fundamental analysis is much more subjective.


Other traders may choose to use technical analysis to drive their trading decisions. This type of analysis is more definitive and relies more on the maths and probabilities behind trading. The specific type of analysis used can be an indicator. They could be either leading or lagging. There are very few leading indicators available, which may give an idea of where the market is going to go.


After determining some of the types of analysis you will use, it’s time to develop a trading strategy. This can be through fundamental analysis, technical analysis, or a combination of both.


What are my weakness?

Maybe you have some fears in your approach to the markets, or you tend to over trade, or you’re glued to the charts for whole days and its stressing you. A stressed mind can’t make good rational trading decisions. This might call for the understanding of market psychology. Creating strategies that keep you from the computer screens might be important in preventing you from overtrading.


How Much Money Am I Willing To Invest In The Markets

This is especially important in creating a plan because it helps in gauging your trading goals. The big question here is whether or not your capital investment is sensible to help you meet your trading goals. Then when answered will determine the leverage you trade with, the trading style, risk per trade, and the minimum target. Trading involves plenty of risk, and you could end up losing all your trading capital. You should never commit to trading any amount you can not afford to lose.


How Patient Am I

Swing trading and position trading opportunities are sometimes slow and apart. And even once spoted, they take time to playout and thus require some patience. Intraday trading and scalping on the other hand are on the fast lane. They are high pressure trading styles. How much waiting can you afford between trade opportunities? This will determine what kind of trader you become and shape your trading strategy and plan




Once these questions are answered it’s time to match your trading aspirations, motives and goals to decide on the style of trading. It’s time to get to work. Its time to invest in forex education and to get practical with the charts to develop a strategy that suits your trading style and goals. This eventually evolves into a trading plan and thereafter it’s time to open an account, invest money and start trading.


Steps to creating a plan


Consider A Strategy

As a trader, you are going to look for what suits you in terms of risk appetite, time availability, trading style, and trading goals. This will mean trying out different methods of trading until you find what suits you. This will determine the type of trader you are, whether a scalper, intraday trader, swing trader or position trader. Once that is determined, you test out different strategies according to your trading style until you zero in on one. You test them out on the basis accuracy, frequency of trades they provide, risk:reward ratio,  maximum number of drawdowns, frequency of losing and winning streaks, best timeframe to trade, etc. This calls for an analytical approach to help identify particular trading setups to consider for the strategy. It could be a confluence of technical analytical tools including for example support and resistance, trend lines, chart patterns, Fibonacci levels, moving averages, news releases among others.


Identify The Highest Probability Setups

Trade setups basically form the strategy. The combination of indicators and a confluence of factors including indicators, market structure and price action form the high probability setup. It’s important that the trader takes time to identify the best setup as this will be the core of the strategy on which his capital is staked and so it has to have a high probability of working out. This helps traders to narrow the traders’ focus on a few which help eliminate any subjectivity. Setups become obvious and easily identifiable and trades become easy to call.


Create A Checklist

Create a list that captures all these details and match each strategy against this list by ticking the boxes on the list. By doing this you’re measuring the reliability of trading systems. When this is done, you gather the information and chose the strategy that preformed best.


Backtest The Strategy

But before implementing it, you first have to test it against different market conditions, on different currency pairs, and different timeframes. You back test it over several trades which could span years to determine its strength, longevity and consistence. This is to help you know its most suited market conditions, the best session to trade it, the optimal Timeframe to apply it on, the maximum drawdown, the best Risk:Reward to aim for, the ideal currency pairs to trade.


Assessing Your Skill

After back testing, formulate honest opinions of the strategy. If it doesn’t measure up to your liking, tweak it until it gives you the confidence to use it in your trading without any hesitation. Master every aspect of it until you’re are able to rely on it to trade without fear of loss. After this is done, it’s time to design the plan


Write Down The Trading Plan

Write down every component of the strategy organizing them into a plan noting exactly how and when to implement it on the market to be traded without hesitation, thinking, or being selective. You are now ready to use it on every trade that meets the conditions detailed in the plan without being picky or selective with trades. You’re going to trust the strategy and trade all opportunities it provides the same whether they’re appealing or not. This will eliminate emotions from your trading.


What Is A Trading Plan

There is no trading plan without a trading strategy.  Why? In simple terms, one defines the other while one completes the other. A trading strategy spells out what must happen before you place a trade. A trading plan on the other hand defines what trading strategies you are to apply and when, and how to manage the trade once taken. Its therefore clear that a trading plan is much more comprehensive than a trading strategy, but none is more important than the other since there’s no one without the other.


A trading strategy is a list of conditions that must be in place before a trade is taken. Such conditions must happen for a trade to be executed. These are what a trader follows to place any trade in the market.


A trading plan basically defines the entire process of trading from the time of entry into the markets, through the trade management process, to the exit. It sets rules that help guide a trader from start to finish with conditions for position entry, position size, reward:risk, when to adjust stops and to what extent. A trading Plan Sets Rules and Processes in place that you use every time you trade. The rules for every trade are the same.


The adherence to the strategy and trading plan eliminates second guessing of trades, takes out emotions so there’s no excitement that can lead to poor trading decisions, and ensures accountability. This helps your trading to become devoid of gambling and ensures accurate timing of trades, consistency and discipline. This in turn improves your edge as all trades are carried out the very same way


The plan will include:

  • Exact setup of interest
  • Entry and exit rules
  • trade management rules
  • Timeframe to trade
  • Minimum risk to reward ratio rules
  • Types of trade entry orders to use
  • Lot sizes
  • Percentage of capital to be risked per trade
  • When not to be in the markets. For example, scalpers need more caution holding trades through news releases – both high impact and medium impact news.


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