How to develop a trading plan

As a map is to a traveller, is a trading plan to a forex trader.

Having a forex trading plan helps you to know where you are going, what to do when certain conditions happen in the market and gives you the courage to over come psychological emotions when trading.

This is because when you have things written down, you are able to stay focused on your trading objectives and rules and this helps you maintain your trading discipline.

It is so unfortunate that most of the traders try to make trading plans but never look at them to trade.  They just trade randomly thinking rules are kind of limitations to a lot of opportunities in the market. A trading plan is very important because when followed it leads to trading consistently, helps you to manage your emotions and at the same time improve your trading strategy.

So you need to plan and at the same time trade your plan to succeed in the market arena!

To develop a successful trading plan you should first of all work on your personal discipline/trading discipline.

First think about yourself and your personal discipline.

If for instance you set your rules as no eating pizza for the whole month because you are working on weight loss. Could you do it even when your best friend surprised you with your best pizza?. Or you will just tell yourself, let me grab this pizza and starve for three days. It doesn’t work that way.  Man! Just say ,No! That’s how far personal discipline can go. Follow your rules and respect them.

If you keep telling yourself let me break the rules today. Promising yourself to do it only once. It may not work out. Out of boundary things appear attractive and convincing. The day you break your rules is when you get the best yield you have never got with trading discipline so that kind of opportunity is likely to happen again and you will find yourself with no choice but do the same thing again.

Remember you don’t know how much effect it is likely to bring in case the trade goes wrong because it is outside your trading plan. It may cause you a very big draw down in that it may be hard to recover your trading capital even if you get several wins.

Discipline keeps you on a straight trading path. It will not only improve your winning rate but also your level of confidence in the market.  Do a self-study first before making any rules. See what matches your personality, take only that.

Reading all the books, mastering all the strategies and learning all the rules doesn’t make you a profitable trader, consider your psychology and your character and match it with all that you have learnt and extract a trading plan. Following your trading plan is what will make you a consistent profitable trader.

Your extracted trading plan should be able to reflect the kind of a trader you should be. It should contain your strategy, journal, risk management tools etc

The Trading strategy could include;

  • The types of analysis tools (fundamental, technical or both)
  • Your entry and exit levels
  • When and how the analysis tools will be used
  • The time frames to use the tools
  • Number of times to monitor your running trades
  • High probability trade, description of what to look for
  • Types of orders to use

The trading journal includes  records of your trade statistics, emotions, etc

Your risk management plan must include;

  • Risk to reward ratio
  • Position sizing
  • Amount to risk per trade
  • Stop loss and target profits
  • When to  cut losses

Then from all that above you will formulate your clear trading rules i.e the do’s and don’ts. This process is what separates the winners from the losers.

Trade your plan.

When you trade your plan you are able to know when to enter the trade, what to do while monitoring an open trade, how and when to cut your losses in case a trade fails, how and where to exit a trade.  You can do that by writing it down under your plan or systemize it so that it works out automatically according to your set instructions. Only that will enable you to take the right actions while trading.

Following your trading plan will help you limit your trading mistakes, minimize your losses and learn to be patient with the market.   It is doing the same thing over and over again that gives you a chance to overcome your fears and develop your confidence. With this kind of experience you will be able to identify your common mistakes and get rid of them.

A trading plan will teach you how to deal with emotions in times when trades don’t go as expected.   Once you learn how to accept your mistakes and take losses as your failures you will be able to handle the market.

Your trading plan will help you to keep honest with yourself so write it somewhere and read it every time you are planning to get in the market and trade by only it.

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