Forex Strategies and Tips
Why You Need A Trade Plan
Would you like to avoid mistakes in your Forex Trading?
That's great! Reducing mistakes directly translates to increasing profit.
But before you can even answer the question 'How do I avoid mistakes?' you have to be able to answer the question 'What does my trading look like if I am doing it right?'.
Right and wrong are relative concepts ~ they are relative to each other. Wrong becomes easy to recognize only when right is very clearly understood.
If your understanding of right is fuzzy, then there's no way you'll ever be able to get clear on what a mistake is, in the context of your own trading.
A Trade Plan: What is 'Right' For Me
The best way to understand what is RIGHT for you in your trading is to create a true Trading Plan. This lays the foundation for every aspect of your life as a trader.
Now, you might be tempted to answer: "Well, I took a class about what I'm supposed to do".
That's nice. But that's not a Trade Plan.
"Well, I have my teacher's manual right here beside me as I trade. That's my plan."
Nope - that's not your plan. That's your teacher's plan.
"Well, the market is always changing, so how I approach it is always changing too."
Oh oh! If that's your answer, there may be no hope for you.
Why It Must Be Your Own
A true Trade Plan is a written document that you create for yourself in your own words. There's not a single word or term or concept in the entire plan that you don't understand.
It doesn't count if you just copy someone else's plan without understanding it yourself. Everything in your Trade Plan is there because it makes sense to you and is something you've thought about.
You have to OWN this knowledge from the inside. It's YOUR plan, not anyone else's.
Your Trade Plan is a set of rules you create for yourself to use going forward. It becomes a way of attaining clarity in the wild world of trading and in this career that is more confusing than anyone ever told you it would be (right?).
Your Trade Plan is also a vehicle you will use for setting your INTENTION, and nothing is more powerful than that. Intention focuses creativity, intelligence and personal energy into a single force. Without this gathering of intention, all action is weak and ineffective. With it - great things can be achieved.
Only with supreme intention can mastery in Forex trading be reached. Your Trade Plan will help you with this more than you can imagine.
Write Your Trade Plan Out
It's not enough that your Trade Plan is a collection of ideas that you hold in your head. Your Trade Plan should have a name or title; it should be dated and numbered.
Example: My Stochastic-MACD Crossover Trade Plan / Version 2 / January 21, 2020.
Over your trading career, you may have many Trade Plans. In fact, it would be surprising if you did not!
(You should see how thick our Trade Plan notebook is!!!)
Each one should have its own document and its own unique identity. Over time you may find yourself referring back to previous Trade Plans and continuing to learn from them - we certainly do with ours.
If you don't take the time to write it all out, you won't be able to refer back to it.
If you don't take the time to write it all out, your ideas will be more fuzzy than they will be if you do write them down.
If you don't take the time to write it all out, you have not created a set of rules for yourself about what right trading looks like, so you won't be able to define wrong trading. You won't be able to eliminate your mistakes.
What Your Trade Plan Is Not
Your Trade Plan is like your own personal set of rules. It's like your plan of attack.
It's not a report card on how well this plan works, nor is it the detailed analysis of the pros and cons of your system.
It's a complete description of how you will go about trading, not about how well this approach worked.
Your Trade Plan doesn't need to include your analysis conclusions, though you may choose to append those later.
The 6 Elements of your Plan
There are 6 main areas of a great Trade Plan that you'll want to address for yourself.
- Money Management
- Environment & General Set Up
- Entry Criteria
- Trade Management
- Exit Criteria
Let's look at each of these in more detail now. Ideally you will have an answer to each topic that you can write down to get you started on creating your Trade Plan.
- Money Management
- What is your maximum risk per trade? (your % risk profile).
- What is your maximum risk for all open trades combined?
- How many trades will you have open at any one time?
- Do you scale into a trade, or enter your full position all at once?
- Do you employ any cost-averaging techniques or stop and reverse? If so, what is your overall risk for the set of these trades?
- If you have a series of losses, do you scale back your risk profile?
- Do you have a maximum for losses taken per day, week or month?
- If you have a series of wins, do you modify your risk profile at all?
2. Your Environment & Setup
- Do you listen to specific mentors, trading partners, chat rooms or news services as you plan your trade?
- If so, what do you do if your opinion differs from what you hear?
- Do you confine your trading to one specific trading session (such as London)?
- Do you trade every day? If not, what days do you take off?
- Do you trade regardless of how you feel? If not, when do you step away from the computer?
- Which currency pair or pairs do you trade?
- Do you have any rules about correlation of currencies that apply to your choice of trades?
- Do you pay attention to upcoming news announcements? If so, which ones?
- What time frame do you trade? (daily chart, 15 minute chart, etc.)
- Do you consider other time frames? If so, which?
- Do you have a contingency plan for what to do if your computer goes down while you're in a trade or the electricity or internet goes out?
3. Entry Criteria
- Do you trade with the trend or counter-trend? What time frame do you use to define the trend?
- What is your entry setup? Describe it as precisely as you can. Include a screen shot of a perfect example.
- Do you have multiple entry setups or just one? If multiple, write out each one with precision and name it.
- Do you use market orders, pending orders (such as a buy stop or limit order) or both?
- Do you set a stop loss (hope so!)? How do you determine where your stop is?
- Do you have a minimum risk-to-reward that you set as a threshold before taking a trade?
4. Trade Management
- Do you hold trades over the weekend?
- Do you ever move your stop into greater risk or move it to reduce risk?
- Do you lock in break even at any point in a trade? If so, describe exactly when.
- Does your decision to remain in a trade fluctuate with what you see the market doing as you are in the trade, or do you commit to staying in a trade until you either take profit or are stopped out?
5. Exit Criteria
- What is your exact exit plan?
- Do you have an exit target before you enter or do you decide your exit as you are in a trade? If before, describe how you plan your target (fixed pips, candle patterns, support/resistance, Fibonacci level, time in trade, etc.)
- Do you set a take profit for your target?
- Do you scale out of a trade or exit all at once?
6. Analysis Commitment
- Do you take screen shots of your trades?
- If so, at what stages of trade development do you take the screen shots?
- Do you record your trades after you take them in a journal or in the Forex Smart Tools Trade Log?
- Do you add notes and observations about each trade in your Trade Log?
- Do you review your trade sometime later to see what happened in the market after you exited the trade?
Talk The Walk
After you've created and written your Trade Plan, it's time to proof it – weed out discrepancies and things that you don't really do.
Discrepancies? In other words, all those places in your Trade Plan where you were really fibbing to yourself. Hopefully there aren't many, but now's the time to see.
Here's an example. We know some traders who say they always use stop losses and never move them. But in the heat of a trade we've watched them sneak their stops further away from their entry and thereby increase their risk, just because they were afraid to take a loss and thought they could avoid it with a bigger stop.
Maybe it's something they don't do every trade, so in their Plan they wrote 'No, I don't move my stop'. But if you do, then it's better to acknowledge that up front. Simply erase it from your Plan right now - or at least put an asterisk next to it.
In this flushing out period, it's time to talk your walk. In other words, look at what you are doing and put words to it.
Usually people use the expression 'walk your talk' to mean 'you say something, now let's see you do it.' But we're asking you to turn that expression around and watch how you actually walk (i.e. trade) and then match your talk (i.e. your Trade Plan) to your actual actions. Talk your walk.
Make sure your Trade Plan matches how you actually trade – not what someone else told you to do or what you think you should be doing.
Now Put It To The Test
The best way to test your Trade Plan is to trade it in the quiet and measured environment of a simulator, such as the Forex Tester. This is easier than trying to apply your complete Trade Plan in the heat of a live trade – at least in its formative stages.
If you see anything you want to change, wait until you've back tested at least 6 months to a year of data. Don't start changing it right away.
If you do make changes, save your original Trade Plan and make a new one with the changes, giving it a new title and date. Always makes notes on why you abandoned your first Trade Plan and moved on to the new one.