Username
Password
Forget Password?
  1. Indices
  2. Commodities
  3. Currencies
Straits Times 3,134.71 +18.54 +0.59%
Hang Seng 26,664.28 +160.35 +0.61%
Dow Jones 27,024.80 +237.44 +0.89%
Shanghai Composite 2,978.71 -12.33 -0.41%
Simplify Your Trading Plan
Education | 21 July 2014
By: Stuart McPhee
Articles (22) Profile

In order to realize any level of success when trading forex, developing and abiding by a trading plan that suits your personality is of the utmost importance.

All experienced traders have a plan they follow, as they understand the importance of having a plan to guide them in their trading actions. To quote French author Antoine de Saint-Exupéry, “A goal without a plan is just a wish.”

    Having a trading plan facilitates your decision-making by helping remove emotions from the equation and it will ideally make you trade more efficiently.

    The best way to ensure you get the most from your trading plan is to write everything down. I believe your trading plan should take into account three broad areas, as follows:

  • Your trading mindset (or psychology)
  • Your money management (position size, pyramid strategies, selecting exits, etc.)
  • Your trading method (requirements for trade initiation, filtering processes, routine, and so on)

One thing I have noticed over the years is many people accept that a trading plan is an essential requirement to trading well, yet they don’t know how to start to put one together. It can be overwhelming at first to tackle this issue.

So, let me simplify it for you. There are three key decisions you need to make when trading, and if your trading plan answers each question, then you may have the makings of a simple, yet robust trading plan.

    In addition to what I listed above, your trading must answer these questions:

  • Under what circumstances will you enter a trade?
  • How much money will you commit to the trade?
  • Under what circumstances will you close the trade?

Don’t Overcomplicate Your Plan
Never picture a trading plan as a detailed document containing pages of information because it will overwhelm you and it may even deter you from compiling one in the first place.

Think in the simple terms as noted above and, once you have answered these questions, add more detail to it as time goes by.

First, under what circumstances will you enter a trade? Let me provide a slightly alternative view to what a trading plan is designed to do. Many would agree that a trading plan and the method listed therein are designed to get you into the market.

My view is counter-intuitive as I believe a good trading plan is designed to keep one out of the market.

Theoretically, there are a number of potential trading opportunities every day. However, the vast majority of these might not fit your trading style, and therefore your trading plan should advise you against initiating a trade.

If a currency pair or commodity makes it through your selection criteria, then it has done so for good reason.

Next, consider your position sizing. Remember, protecting your trading capital is the most important thing you can do. Determine your risk amount, your maximum limit for each trade, and then determine how you will calculate how much money to commit to each trade.

Finally, the most critical part: when to exit. Notwithstanding the importance of mindset and cutting losses, from a technical standpoint, this would be the most common problem inexperienced traders have.

The problem is not that traders don’t set initial stop losses or trailing stops, but where they place them.

Trade With A Disciplined, Realistic View
Winning traders will often use simple approaches and they will use them consistently.

It could be argued that a poor plan with solid risk management rules used consistently is going to outperform an approach where you are constantly jumping from one method to another.

As I’ve stated before, no matter what you wish to achieve by trading forex, priority No. 1 must be preserving your capital.

If you’re just starting out trading forex, be humble and remember you are not going to get every trade right. In fact, you will be proven wrong often but don’t get discouraged. Be committed, patient, realistic, and always take a disciplined, businesslike approach to trading.

Get a free OANDA demo account to start developing your trading plan and to test your trading strategies on the award-winning fxTrade platform.

Stuart has more than 16 years of trading experience under his belt and specialises in technical market analysis of major currency pairs. Apart from being the author of several bestselling trading books, with his most recently released book "Trading in a Nutshell", Stuart contributes to daily newletters and blogs. He also produces articles and videos on the how tos of technical tradings. For more information of Stuart, you can follow him on twitter @stuartmcphee or check him out on Google+.

Please click here for more information about this author.


Join The Conversation
The Shares Investment editorial team welcomes constructive feedback on our coverage and content. We would also be delighted to answer any questions on the above article. Leave us a comment below, and we'll get back to you shortly!

All Rights Reserved. Pioneers & Leaders (Publishers) Pte Ltd. Best viewed with Mozilla Firefox 3.5 and above.