This is a guest post by Matthew Johnson
You must have heard several times that it is important to have a trading plan and stick to it. Not having a trading plan is like an invitation for failure as a trader. What is meant by building a trading plan? Here are some broad points to consider.
The Importance of a Trading Plan
Trading plan is nothing but a checklist. You refer to it before taking a trade. When in a trade you refer to it to make sure that you take a decision according to a plan. Checklist also helps you to stay away from trades which are low probability set ups. The whole idea behind the trading plan is to keep emotions away and take decisions logically.
Stay Away from Bad Trades
The first aspect of the plan should be an affirmation to take only those set ups which are in accordance to your trading strategy and that you will not indulge in overtrading or revenge trading. This will allow you to stay away from bad set ups. If you are a price action trader and take only daily or weekly set ups, you can read the affirmation daily till it becomes your second nature not to look at lower time frame and study only daily and weekly charts.
Write Realistic Expectation
The next part of the plan is to devise a realistic expectation from your trading. It could be in monetary terms like earning so and so dollars each month. Don’t expect to earn thousands of dollars right from the start. Here’s an excellent example of trading with realistic expectation: double your account with 4 trades per month.
A Concrete Trading Strategy
Now we have come to the core of the trading plan which is formulating a trading strategy. After demo trading for a few months will let you know which trading strategies suit you better and which trading strategies you are good at. Knowing is not enough. You should customize your trading strategy to suit your needs. It will not be the same strategy for a trader with a million dollar capital and one with few thousands dollars of trading capital.
Incorporate Aspects of Risk Management
A special attention should be given to money and risk management. Depending on the initial capital, you should determine what the acceptable risk is for you on each trade. You should create a template in excel which will give you the trade size. Also once in a trade, you should keep assessing the progress of a trade. The factors to be assessed should be clearly mentioned in a trading plan. It typically involves the profit targets, when to book a loss if trade goes against you etc. This will help you in better management of the trade.
Your Location Plays a Role
Forex trading is different from stock trading. Everyday different events happen that affect the currency market. You as a trader should keep an eye on these events and decide when to be in the market and when you should stay away from the markets. Also different aspects have to be considered depending upon your location in the world. It may not be possible for you to trade every single currency 24 hours a day. Your trading capital can also play a role here. It may not be possible for every trader to trade certain instruments because of the margin requirement and risk involved.
Having a written trading plan will be of immense help. It will keep a tab on you to make a logical decision. If you don’t have a trading plan, build one for you right away.
About the author:
Matthew Johnson runs FXBuild.com, which provides useful tips, strategies, and reviews for traders. Read more of his tips on FX Build Trading Tips.