How to Make a Trading Plan?

Hello, Forex traders. This time, we will address a Trading Plan, one of the basic things that every aspiring successful Forex trader should have. Many people, having read stupid articles in the network, confuse a trading plan with the rules of a trading strategy. But these are two different things. What a trading plan for Forex trading is, what it consists of, what it includes and how to make it you’ll learn by reading this material.

 

4 required documents for any trader

Each trader must have 4 documents thoroughly composed and written both in electronic and in printed form, namely:

• Rules of the Trading Strategy
• Checklist for entering a trade
• The Rules Of Money Management
• Trading Plan

1) Rules of the strategy are clear rules of entry to and exit of transactions describing the time of trading, timeframe, currency pairs, the elements of the analysis and other nuances that are directly associated with opening and closing of transactions.

2) Checklist for market entry — a List of conditions to open trades. You put a checkmark in each of the conditions if at least one of the conditions is not met, we do not enter a trade.

3) The rules of your money management — clearly defined instructions for calculation of your position size. This can be % of the deposit, N lots for X units of balance or other methods of calculation of your order size.

4) A trading plan is a roadmap which gives answers to ALL possible questions of “what if” in your trading. Most often you can get advice to add and the rules of strategy and money management and a lot of unnecessary things in your trading plan. I am opposed to having everything in “one pile”. Because when you have a large amount of information, you can’t pay enough attention to it, and it turns out that it seems that you have a trading plan, but it’s no use.

 

What should be a trading plan?

Below is a list of parameters that the trader should include in his trading plan. They are differentiated by categories and there are examples. Don’t forget that these are just examples; you will need to make your own specific items of the plan based on your trading strategy, money management, overall risk and views on the foreign exchange market.

1) Force majeure

You should clearly specify (and should take all necessary preparatory measures) what you will you do if: electricity is shut off, “Windows” is broken, The Internet is disconnected, and aliens start attacking ….

Precautions against such circumstances typically include a laptop with a charged battery (in addition to the main computer), smartphone/tablet with installed mobile MT4, VPS server, 3G modem or smartphone with a modem mode, a list of nearby cafes with free WI-FI, phone numbers of your friends living nearby.

2) Limitation of profits and losses

Also, it must be specified what you will do in case of a large profit, sufficient profits and a string of losing trades. It is very individually and depends on your trading style and risk. Here are few examples for you to understand what it is about:

• “After reaching a profit of 20 pips, I don’t trade this day anymore” (Please note that 20 pips is a limitation of profits per day, but not the goal. It’s important - it is very dangerous to set GOALS for profits).
• «After 5 losing trades in a row, I take a break for a week.»
• «With the drawdown of 20%, I stop trading until the end of the month»
• «If I earned 10%, I don’t trade this week anymore»
• «If I get 3 stop-losses for 1 pair, I’m not trading it this day anymore»

3) Emotional state — when it is forbidden to trade

• «If I’ve got sick, I don’t sit at the computer this day.»
• «If I’m depressed, upset or just I want to sleep, I should not enter the terminal»
• «If I am too excited, angry at someone/something, I can’t concentrate, I’m very happy about smth., 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 each strategy should be used.

For example:

• «If the market was in trend for the last week, I use X strategy, if the market was in flat, I use Y strategy»
• «The EA enters the market, then I turn off the Advisor and control the position under the rules of Z strategy»

5) Sources of information

Examples:

• «I control the list of upcoming news on the economic calendar, I don’t trade half an hour before and half an hour after the important news. If the NonFarm Payrolls is published this day — I do not trade at all»
• «I mark all possible setups on the chart, but before I enter trades, I check my analytics. If there are contradictions, I double-check the ability to enter»

6) Short-term and long-term goals in trading

It is important to keep before the eyes the memo of why are you actually doing this. This will help you to get back down to earth (why do you need 100500 trades per day if your goal is stable 10% per month) and to remember about long-term plans in periods of drawdowns.

Examples:

• «My goal is 5% per month. So I understand that it is silly to chase the number of transactions and look for entrances where there are none»

• «Trading is interesting for me like a hobby. I earn enough. So I do not risk more than 0.5% in one trade»
• «I like the market as a source of adrenaline. I like risk and I like to win. I understand that this approach is dangerous and I never put on the Deposit the amount that is more than I can afford to lose»
• «I borrowed 100 000 dollars from the mobsters. I understand that if I don’t refund 120 000 in a month, they’ll kill me. Good luck to me»

7) Something of your choice

This can be your favorite quote, a personal rule of “not to look at the terminal more than 2 times per day or to lock a cat in another room at the time of chart analysis”. Or some nuances associated with your trading methodology.

Your trading plan

Be sure to make your trading plan. Print it out and put it on the table next to the computer. Or attach it to the wall. It is important that this document was in front of your eyes. And of course, you need to follow it.

Take care, Michael

ForexTraderPortal.com