Why Have a Trading Plan?
Trading without a plan in the Forex market is like attempting to row a boat without oars. Experienced traders will first have a plan and then do their best to stick to it. As the well-known Forex market maxim goes, “plan your trade and trade your plan.
Essentially, having a good trading plan could mean the difference between success and failure in the trading world. A comprehensive and easy to follow trading plan — containing directions for the appropriate course of action for any and all possible trading situations that may arise will greatly enhance just about anyone’s trading performance.
A good trading plan allows a trader to make trading decisions based on pre-determined objective parameters. This saves the trader from relying on hunches, gut feelings or emotions.
Advantages of Trading with a Plan
Thus, most successful traders avoid trading on emotions like the plague because they know that once emotions take over, you can just say goodbye to the account in most cases.
Instead, they aim to develop a set of criteria for initiating and exiting trades. This planning process takes a lot of the guesswork out of trading and leaves the trader’s mind free to do additional fundamental market research and technical analysis.
Basically, trading with a plan in the forex market makes up the most prudent approach to trading in this sometimes very volatile financial market.
Trading Plan Content
A comprehensive trading plan would typically list the general objectives of the trader, as well as a number of other details about how those objectives would be accomplished during the trading process.
Common Elements of Trading Plans
Among some of the elements that many trading plans include are the technical parameters for initiating positions in the Forex market, as well as the market conditions suitable for exiting the trade, either for a profit or to limit losses when trades go against expectations.
Most trading plans also include a position sizing technique and a minimum risk/reward criteria for each trade that will be taken. These elements ensure that the trader can trade the market without drawing down his account excessively on unprofitable positions or a string of losses.
Ideally, the trading plan will account for every type of market eventuality and condition, leaving nothing to surprise the trader. Stop loss parameters for limiting risk and how to place trailing stops on profitable positions should also be clearly delineated in the plan.
Trading Plan Essentials
Trading plans must contain a minimum of information and structure in order to be easily followed by the trader. Some of the more important elements which should be included in just about any trading plan consist of the following:
Essentially, each trading plan is as individual as the trader applying it, and no two traders will trade in exactly the same way.
Some trading strategies will not have a higher stop loss than 40 pips while others will regularly use stop losses of 200 pips or more, hence, the same approach for position size calculation cannot be used for both of these strategies.
The plan should also contain a money and risk management component which would limit the amount of risk taken, usually by utilizing stop loss and trailing stop techniques for limiting market exposure and protecting profits.
Furthermore, the plan should set clear goals for the returns on the account over a certain period of time, usually, this is a period of 1 year. Minimum risk reward ratios for each trade taken could also be determined as part of the trading plan.
Setting Goals in the Trading Plan
Knowing your goals before you begin trading and having a clear idea of how to achieve them is the main purpose of having a trading plan.
You generally cannot achieve a goal without first setting one. Therefore, take the time to figure out how much you plan to make from your trading activities and what steps you are prepared to take in the realization of this goal.
Overall, having a well-defined and objective trading plan and a clear idea of what you aim to achieve through engaging in the trading process will greatly enhance your chances for success over the long term.
Barriers to a Successful Trading Plan
Several things could stand in the way of a successful trading plan, but probably the biggest among them is the trader himself and his emotions that may cloud logical reasoning when trading.
Essentially, once emotions take over the trading process, it’s only a matter of time before losses start to outnumber and outweigh gains. Halting trading activities completely and taking a rest from trading when found in such a downward emotional spiral is one way that a trader can pull himself out of the situation.
The Importance of Discipline When Trading
The number one cause for the failure of what would otherwise have been a successful trading plan consists of the trader’s loss of discipline when implementing it.
A loss of discipline can have the trader stay in losing positions without getting out, thereby disregarding their trading plan and trading instead by the proverbial “seat of the pants” method that is famously unsuccessful in the long run.
Sticking to the trading plan no matter what happens is a quality of professional and profitable traders.
Emotions and Why They Must be Managed When Trading
The main emotions that arise during the trading process which can stand in the way of a successful trading plan, as well as affect the markets in general, consist of the following:
When trading for success, remember to make sure that these emotions do not get in the way of you sticking to implementing your trading plan.
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