“Everyone has a plan ’till they get punched in the mouth” – Mike Tyson
In the fast moving world of Forex trading, where high-concentration is required for extended periods of time and decisions must sometimes be made in a split-second, it is crucial to have a plan, a plan that you can trust and stick to no matter what is happening.
A well thought-out and clearly produced trading plan is an essential tool to have and not just for new traders either.
Producing a clear trading plan not only provides the key benefit of essentially having a written guide to tell you how to operate each day in the market, but it also means that you have taken the time to properly consider your goals, your ability, your strategy, and your risk.
So what sort of things should you include in a trading plan?
A trading plan is a very simple document. It can simply be a piece of paper or card on your desk that gives you the exact rules that you are allowed to trade by. It defines what you can do when you can do it and how you do it.
It doesn’t have to be too detailed but it should at a minimum cover several key components:
- Entry and Exit rules for trades
- Risk / Reward (where your stop losses and take profit targets go)
- What you need to be wary of.
Often, but not always, a trading plan might look like a series of diagrams and example charts with a set of rules, followed by a checklist for entering a trade depending on the strategy.
The point of a trading plan is to add discipline to your trading, to remove some of the emotional subjectivity, and to ensure you follow the rules you know work for you.
Essentially, the core aspects of your trading plan should consist of clearly detailing the strategy you use to trade and the exact rules you should follow when trading.
You can also include rules about how you identify market conditions as being favourable for your core strategy and rules regarding your total risk and exposure such as, not taking more than two trades in one Currency and not risking more than 5% of your account in one week.
Your trading plan should also include key trader psychology guidelines such as how to avoid over-trading, how to handle retracements and other key scenarios which are likely to occur and threaten to disrupt your trading.
When constructing your trading strategy rule set it is important to really put some thought into it and consider things as fully as you possibly can.
Often, situations occur in trading that a trader will not properly be prepared for, and these situations present the greatest risk for deviation from your trading plan.
What are some of these situations?
- Price comes just shy of your entry price and starts to move away. Do you enter or wait and enter only if price comes down to your exact entry level
- Price just misses your take profit target and then starts to reverse. Do you exit or hold and exit only at the profit target?
- You move your stop to breakeven, prices comes back and triggers your breakeven stop only to then reverse back in the direction of your trade. Do you re-enter?
- Price stops you out but then reverses and trades back through your original entry price and in the direction of your trade. Do you re-enter?
- You are in profit heading into a news release. Do you move to breakeven, take half-off or exit fully?
These are just some of the situations that can occur on a daily basis and throw you off course, no matter how good you think your plan is. Much like an army general trying to contemplate the moves the opposing general might make, you must try to fully consider all of the situations that can challenge you each day and establish strict rules for how you will manage them. A lot of this will only come with experience, but it is certainly a worth while exercise to undertake.
Build a trade example journal by taking screenshots of trades that have gone badly and annotate them to show what went wrong and what happened in the market. Doing this will allow you to build a reference that you can turn to in times of uncertainty such as price just missing your target and reversing, helping you to have the confidence to make the right decision when it counts.
Use a trading journal! Each day you should journal your activity in the markets, keep notes on how you were feeling as price action and folded and what you thought was likely to happen. Keep notes on how you felt executing your plan and whether you were tempted to deviate from it or not and how you reacted to winners and losers. Keeping a detailed journal will help build your confidence in trading and as with the trade example journal, it well act as a reference for times of uncertainty. It will also help to highlight any weaknesses in your trading plan and perhaps offer new trading ideas if you, for example, you are regularly anticipating a certain movement occurring in a certain situation, it may become something you can trade.