To be a successful trader, you need two things:
• a strategy that gives you an edge
• and a trading plan that allows you to successfully use that edge.
One, without the other is useless.
You can be a wonderfully disciplined trader, but if you’re only getting into duff trades, you can’t make money.
You might have a fantastic strategy, but if you’re implementing a proper plan with good money management – you won’t last long.
And yet, most traders I speak to spend a huge percentage of their time chasing after the strategy that’ll give them the edge – like it’s some holy grail. And they completely fail to address the trading plan that will make or break that strategy.
One without the other is useless. In fact, it’s worse than useless, because it’ll probably lose you money.
So, what does a trading plan look like?
I think that many people are put off creating a trading plan because they think it needs to look like a biography of George Soros. A trading plan doesn’t need to be a huge complex tome. It just needs to lay out the basic scenarios that you might come across, and explain how you’ll deal with them.
And, as new ones crop up … you can add them to your plan.
Creating a trading plan really doesn’t need to be rocket science. It just takes a little time and effort to get the project started.
It’s difficult to lay one out on a plate, as it needs to be different for different people – depending on how much time you have available … how much money you have to spend … how risk-averse you are …
So, I thought that this week I’d show you three trading plans that you can adapt to base your own trading on. These aren’t failsafe solutions to trading success, but if you’re happily plodding away at the markets, without a plan that looks something like one of these, well, you’re unlikely to be plodding happily along for very long!
Trading Plan 1
Goal: To make an overall profit of 15% on my trading account in my first year of trading forex.
Markets: I will be trading EUR/USD and GBP/USD as these are large markets with low costs.
Schedule: I will trade from 7am to 9am each morning.
Timeframe: I will be looking for signals on 10 minute charts
Technicals: I will wait for my technical signal to enter a trade only in the direction of the medium-term trend. I will exit my trade according to support and resistance levels.
Fundamentals: I will avoid trading at times when there are big economic announcements and will not trade on the first Friday of each month (when non-farm payroll data is released).
Money management: I will risk 2% of my trading fund on any trade. If I experience a drawdown of 6% in one day, I will stop trading until the following day.
Discipline: I will not take any trades that do not follow the rules outlined in my strategy. I will remember that being out of the market is also a position, and accept that some days there may be no signals to take.
Trading Plan 2
Goal: to make 50 pips profit a week.
Markets: EUR/USD, GBP/USD, USD/CHF and JPY/USD
Schedule: I will set up alerts to tell me when a possible trade is setting up, and I will be available to act on those alerts over the course of the day, from 8am to 4.30pm
Timeframe: I will be trading 5 minute charts
Techncials: My trading signals will tell me when key specified levels are hit. When I get a signal, I’ll open my charts and watch for my price-action criteria to be fulfilled. If all the criteria are fulfilled, I’ll enter a trade.
Fundamentals: I do not include fundamentals in my analysis.
Money management: I will risk 1% of my fund on any trade. If I am 5% ahead in the day, I’ll stop trading. If I’m 5% down on the day, I’ll stop trading. I will regularly withdraw my winnings rather than reinvest them.
Discipline: I will never be in more than four trades at one time and will ensure that I’m never exposed to the USD in one direction by more than 3% at one time.
Trading Plan 3
Goal: To grow my trading fund from just £5,000 to £20,000.
Markets: major indices and forex pairs
Timeframe: 4 hour charts
Technicals: I will be swing trading, using consolidation patterns to signal trade entries. I will use Fibonacci levels and support/resistance to determine my stop levels and profit targets.
Fundamentals: I will consider closing a trade that’s already in profit early if there is a major announcement impending.
Money management: I will risk 2% of my fund on any trade. I will not withdraw winnings until I reach my goal. I will reinvest all winnings.
Simple, straightforward building blocks
As you can see, there’s nothing complex or mysterious about building your trading plan. And, once you’ve got one started, you can build on it. The truth is that my trading plans improve most when I make mistakes – these are the lessons that allow us to add new rules and to fine-tune our trading techniques.
And if you have any other ideas of what you include in your trading plan, please share with us here.