How to make a trading plan
Greetings, fellow forex traders. This time we are going to touch upon one of the basic things that every aspiring currency trader should have – a trading plan. Many people, after reading silly articles on the net, confuse a trading plan with the rules of your trading strategy. Well, they are different things. You will learn about what a trading plan for forex trading is, what should be included in it and how to make it, after reading this material.
4 mandatory documents for a trader
Every trader should have 4 documents, thoroughly compiled and prescribed both in electronic and printed form, namely:
- Trading Strategy Rules
- Checklist for entering a trade
- Rules of Money Management
- Trading Plan
1) Strategy Rules – clear rules for entering and exiting trades, also describing: trading time, timeframe, currency pairs, elements of analysis and other nuances related directly to the opening and closing of trades.
2) Market Entry Checklist – A list of conditions for opening a trade. You tick each of the conditions, if at least one of them is not fulfilled – we do not enter the market.
3) The rules of the mani-management used – clearly defined instructions for calculating the size of the position. Whether it is % of the deposit, N lots for X balance units, or other methods of calculating the order size.
4) Trading Plan – a roadmap that answers ALL possible “what if” questions in your trading. Most often, the trading plan is advised to include strategy rules, mani management and a bunch of other unnecessary things. I am against everything being “one pile”. Because with a large amount of information, you just will not pay proper attention to it, and it turns out that there is a trading plan, but it is of no use.
What should a trading plan consist of?
Below is a list of parameters that a trader should include in his trading plan. They are categorized and examples are given. Keep in mind that these are just examples – you will need to make specific items on your own, based on your trading strategy, mani management, overall risk level and views on the currency market.
1) Force Majeure
You should have a clear statement (and you should take necessary preparatory measures) what you will do if: the power goes out, windows goes down, the internet goes down, aliens invade…..
Precautions against such circumstances usually include: a laptop with a charged battery (in addition to the main computer), a smartphone/tablet with mobile MT4 installed, a VPS server, a 3G modem or a smartphone with modem mode, a list of nearby cafes with free WI-FI, phones of friends living nearby.
2) Profit and loss limits
It should also be spelled out what you will do in case of large profits, sufficient profits and a series of losing trades. This is highly individualized and depends on your trading style and risk. A few examples to give you an idea of what we are talking about:
- “After reaching a profit of 20 pips, I don’t trade anymore that day.” (Note that 20 pips is a profit limit per day, but not a goal. This is important – setting OBJECTIVES in profits is very dangerous.)
- “After 5 losing trades in a row, I take a break for a week.”
- “At 20% drawdown, I stop trading for the rest of the month.”
- “If I make 10%, I don’t trade that week.”
- “If I get 3 stop losses on one pair, I don’t trade it anymore that day.”
- Etc.
3) Emotional states – when you can’t trade
- “If I’m sick, I don’t sit down at the computer that day.”
- “If I am depressed, upset, depressed or just want to sleep, I should not use the terminal.”
- “If I am too excited, angry at someone/something, can’t concentrate, very happy about something, enthusiastic, scared, nervous, etc.. – I will not open a trading platform.”
4) Complex trading tactics
If you use several trading strategies, describe the conditions when which one to use.
For example:
- “If the market was trending last week, I apply strategy X, if the market was flat – strategy Y”
- “The Expert Advisor performs market entry, then I disable the Expert Advisor and manage the position according to the rules of strategy Z.”
5) Used sources of information
Examples:
- “I look at the list of upcoming news in the economic calendar, half an hour before and half an hour after important news I do not trade. If there are Non Farm Payrolls on that day, I don’t trade at all.”
- “I mark possible setups on the chart, but before entering trades, I check with analytics. If there are contradictions, I recheck the possibility of entry.”
6) Goals in trading – short-term and long-term goals
It is important to keep a memo in front of your eyes – why you are doing it at all. This will help you both get back on track (why do you need 100500 trades a day if your goal is a steady 10% a month) and remember to keep long-term plans in mind during slump periods.
Examples:
- “My goal is 5% per month. That’s why I realize that chasing the number of trades and looking for entries where there are none is foolish.”
- “I am interested in trading as a hobby. I earn enough. That’s why I don’t risk more than 0.5% in a deal.”
- “I like the market as a source of adrenaline. I like risk and I like to win. I realize that this approach is dangerous and I never deposit more than the amount I don’t feel sorry to lose.”
- “I borrowed 10,000,000 rubles from bandits. I realize that if I don’t pay them back 12,000,000 in a month, they will kill me. Good luck to me.”
7) Something of your choice
It can be a favorite quote, a personal rule “do not look at the terminal more than 2 times a day” or “lock your favorite cat in another room while analyzing charts”. Or some nuances related to your trading methodology.
Your trading plan
Be sure to make your trading plan. Print it out and put it on the table next to your computer. Or mount it on the wall. It is important to have this document in front of your eyes. And of course, it should be followed.
How to make a trading plan Trading article for TLAP readers with practical market context.