TRADE PLAN

So many traders treat trading like a hobby, placing trades arbitrarily without thought to how much they want to make, how many trades they need to place to make  positive cash flow. I think traders desperately want to make a quick buck so much so, that the idea of having to put in actual work seems counter intuitive. Traders I have trained understand the importance of using a trading plan but very few ever use it. Is there a correlation between successful traders and their use of a trading plan? Yes there is, ALL successful traders trade with a plan and journal their trades, albeit to varying degrees of detail.

 

Here are some of the Advantages of using a Trading Plan

 

  1. Management of Emotions: You are far less likely to panic if you are using Google Maps when driving in an unfamiliar neighbourhood. Why? The map tells you were you are in relation to where you want to go. You might not have arrived yet or you took a detour but the map will guide you back, keeping you emotionally steady.
  2. Objective Evaluation of Performance:  When you use a well laid out trading plan you are able to objectively evaluate how you are performing. Let’s assume your account is up 40%, you will be more likely be able to walk away and not place trades driven by greed if your plan was to be up 20%. The plan tells you that you are well ahead and performing as planned. This will help you wait for another good high probability set up.
  3. Improving Performance:  On the other hand if you are not performing as planned you are more likely using a bad plan or you are not following your plan. This is important feedback and any decision you make thereafter is likely to increase and sharpen your performance.

 

Now that we know we need a plan, how do we come up with a good trading plan? A good trading plan should cover the following areas:

 

  1. Profit Target:  This should be obvious. You are in the trading business to make a profit so your plan should detail how you intend to make that profit. You need to know
  • What Pairs you will focus on trading
  • How often you will trade a week/month
  1. Risk: Think of risk as the cost of doing business. It’s unavoidable. You need to know how much you are willing to risk per trade and how whether the target profit is worth the risk taken.
  2. Risk Reward:  Remember that as a reader you have to trade in such a way that you only anticipate to be correct 20-30% of the time. Trading with a good RR of 5 and above will always save your account.

 

These two areas are very important. Traders tend to not want to consider the risk. They believe a good trader is one who doesn’t take any losses. I can tell you first hand that I have had many months of consecutive losses but one thing I have learnt is how to not blow an account during these  drawdown periods.  This is because I always think in terms of risk. All my trading decisions consider risk first before considering potential profit. Always remember that Profit is not guaranteed no matter how great the setup, the trading plan or the preparation.

TRADE JOURNAL

Having put together a great plan that you feel you will be able to follow, the next thing you need to do is follow the plan. The only way you can follow the plan is to record your actual trading results. This means using a trading journal.

 

In summary the purpose of a trading journal is to:

 

  1. Record your actual trading results;
  2. Compare these results  against your initial plan;
  3. Adjust your trade plan using the feedback you are getting from your journal. For instance, if your plan says you should place 10 trades and you find that in reality you are only comfortable placing 5 trades a week, then you can adjust your plan to account for 5 trades. You may then increase the % risk and RR per setup to still make a 33% return on 5 trades.

 

Note: a high frequency of trades does not mean higher profit potential. You could make all your profit from just 2 trades a week.

 

A TRADE JOURNAL IS BY FAR THE MOST IMPORTANT TEMPLATE YOU WILL USE AS A TRADER!  It tracks everything! Here are the things that must be captured and recorded after each and every trade

  1. Date and Time of placing the trade;
  2. Currency Pair traded;
  3. Trade direction i.e. Long or Short;
  4. Type of Setup taken;
  5. Timeframe used to make analysis i.e. 15min, 30min, 1 hr. etc;
  6. Actual amount risked (You need to make the amount you planned to risk is the actual amount you then risk);
  7. Volume size taken on the trade;

Below is an extract of my trading journal.

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