In a nutshell, your plan must elaborate in detail the whats, whens, hows, whys, and it must include the best case, expected case, and worst case scenarios. Below, I will deconstruct what experience has taught me to consider the most critical elements a plan must include.
1. Why Do You Trade?
There must be an underlying reason for your interest to trade the markets. Making money alone won’t cut it simply because it has to do more with the ‘how’ than the ‘why’. At the end of the day, the regular paycheck that trading forex can provide to the professional traders is just a by-product and means to your goal.
The actual ‘why’ must be one or a series of reasons that drive you.
It could be the achievement of financial independence so that you can live life on your own terms and stop working for someone else in a job you don’t like. It could be providing your family with the best possible life. It could be the independence to live anywhere in the world through the income that trading generates. It could be the desire to continuously grow as a human being or buying a dreamed car, etc. It will be this ‘why’ that will hold you accountable and keep you ‘on track’ with your long-term goals when the going gets tough. I’ll go even further. You really want to find some pictures related to these true goals and paste them in your trading plan an even in the wall of your trading office right in front of you. They must be staring at you!
2. Define Your Daily Routine. The more mechanical and consistent your trading habits become, the greater the odds to be part of an elite group that makes money on a regular basis. Your trading plan should describe what your daily rituals are from the moment you come to your trading desk until you call it a day. This will set you apart from the amateur-type trader that simply tends to show up at their desk, stumble from one trade to another without any previous preparation, and expect to be at an optimal level to perform and extract profits.
Your routine may include at what time do you come to your office to start the preparation for your trading day ahead? how do you prepare mentally? do you run daily exercises to stay emotionally and psychologically detach from the monetary value of your account?
Do you work out to stay fit and your brain ready for peak performance? How long will you dedicate to scan the markets? How will you decide what instruments are most suited to trade your strategy? Are you aware of the risk events for the day? and much more. Make sure that as part of your routine, you are as efficient as possible. What this means is to automate the maximum number of tasks in order to eliminate redundant processes, hence you are more efficient with your time.
3. Describe Your Entry & Exit Strategy. We’ve come to the section of your plan that determines the set of conditions you must identify in the markets that will validate an entry and confirm an exit. You must be very precise and consistent in applying these rules. I’d like to outline what constitutes a quality trade from an average one.
Further, don’t overlook how critical it is to come up with the conditions that will get you out of the trade, either by hitting your stop loss or take profit. Traders tend to get too caught up with the entry, but it’s the actual exit that sets the standards for the amount of reward you get out of each entry.
You also must define the forex pairs you want to monitor for potential trading opportunities. The natural evolution will be for you to gradually shrink the length of the text/description of your strategy to the most critical aspects as you ingrain the overall process in your mind. That’s what I personally do.
In terms of the conditions to look for, these can include: Does the market need to be trending or not necessarily? Will you only trade at specific price levels based on lines of support and resistance previously drawn, will you be more momentum based? Here the approaches are almost unlimited. What time frame will you trade? Cross-checking higher time frames from the one you trade from to find a congruence of factors is a wise move that I personally apply. However, when it comes to pulling the trigger, if you are randomly jumping time frames, that’s a recipe for disaster.
4. Trade Management. It’s here that you must decide the type of risk you will put on a particular trade. Don’t ever fall into the trap of defining the success of a trade in the number of pips you made. What really matters here is the correct position sizing, which will be determined by the size of your stop loss vs the total amount you are willing to lose. If your account is worth $10k, you then must decide what monetary value you are fully accepting to find out whether or not the analysis you’ve conducted will result in the price going in your desired direction. You must be completely detached from the monetary value of your trade, which starts with accepting the money at risk. If there is any type of emotional attachment to your position, sooner or later you’ll start messing around.
As part of managing trades, never forget the key pillars to keep in mind (win rate, risk-reward, risk percentage).
You will also need to set the maximum risk you are willing to accept per day, per week and per month. Also, you must work out your total risk exposure at any stage, the maximum correlated risk in case you are trading the same currencies or how many trades will you have open at one time as to not keep you off track unable to focus on all your open positions. You also want to potentially figure out some rules to take some time off the screen or even a whole day off to clear your head or as a form of re-assessment if the proverbial hits the fan and you experience a severe drawdown.
This exercise will be priceless to avoid certain pitfalls traders fall into such as revenge trading.
As part of your trade management, assuming you’ve achieved a state from which you are able to detach from the emotions and the monetary value of the trade, these are the right questions you must constantly ask yourself when putting on a new trade. Remember, it’s all about the process!
Questions: Was the action I’ve taken prescribed in my trading plan? Was the risk level appropriate, neither too large or too small? Did I account for factors such as market conditions and correlated risk? Did I make any emotionally-driven errors in my entry, exit or risk management?
5. Review Trades & Keep A Journal. Do you find yourself committing recurrent trading mistakes? Have you identified some common patterns that you either want to reinforce or avoid altogether? Do you fall victim to your own shortcomings when it comes to disciplinary routines that you know deep inside must be addressed? Trust me, this list can stretch almost infinitely unless you take action.
You must be a good record keeper.
The reason why keeping track of your trades is such a valuable exercise is because here is where you gain the constant feedback loop on why and how you won or lost a trade. Especially when you lose, finding out if the trade was due to a mistake, so that you can minimize them and ultimately eliminate them is extremely important. At the end of the day, the reason you are aware of bad habits is through a review as it allows to unveil what your patterns and behaviors throughout the days are. By monitoring them, you make sure they are less frequent. Since trading is a business, you must be the accountant that keeps track of all the details.
As a trader, you must discover through your own journey both the most recurrent negative and positive actions and take note. If we are unable to spot, find a solution and take action to change certain behaviors affecting our performance, the risk is that we’ll be constantly trapped in a vicious cycle.
The more we are reminded of the area we must correct, the more aware we are not to make the same mistakes in the future. Minimizing the number of mistakes we’ll commit as traders is absolutely essential. In fact, successful traders can attest that a large share of one’s merits to be a consistently profitable trader is to have eliminated their trading mistakes to the bare minimum.
Similarly, we must remind ourselves of the positive actions we are performing that will reinforce these habits.
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