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Creating Your Own, Personalized Trading Plan

What is a trading plan?

Before launching into creating a trading plan, you must understand that the term trading plan is not synonymous with trading strategy. Many traders are confused about the distinction between the two.

A trading strategy is a strict set of rules used to trade the markets. Your trading strategy should include specific market conditions, indicator readings, chart setups, triggers, stop-loss amounts and take-profit goals.

A trading plan, in contrast, is a broad set of rules that encompasses your trading strategy but also covers a range of additional subjects and decision points associated with trading. These include things like which markets you will trade, the time of day you will trade, how often you will trade, account size, money management and investment in equipment and ongoing trader education.

Think of your trading as a business endeavor and your trading plan as your business plan. That will help clarify the purpose and role of your trading plan.

Control Your Fear and Greed

At the same time that your trading plan guides your decision making, helping you operate more efficiently and effectively, it will also contribute to eliminating a huge barrier to success in trading – disruptive feelings of fear and greed.

These emotions are invariably a challenge for beginning traders, but many veteran traders continue to struggle with them. When a trade goes into a loss, you experience mind-numbing anxiety and feelings of buyers’ remorse. When it goes your way, you become euphoric and are filled with overconfidence. Both reactions are unwelcome because they crowd out rational decision making.

Traders must learn to control their feelings, and one of the best steps to take is to create a plan that pre-defines exactly how they will act in all situations that could be emotionally charged. Stress is relieved when you are confident that, despite the outcome of a given trade, your trade plan is sound and you will be profitable in the long run.

The following are some of the critical topics you will want to address in your trading plan.

Personal objectives
Be honest with yourself – what do you want from trading? To become rich beyond your ex-girlfriend’s wildest dreams? To supply your family’s main source of income? To earn a little extra cash? Once you truly understand your goals, you can begin to figure out what you need to do to achieve them.

Specific trading strategy
Write down your strategy in detail. Start with the market conditions (trending or ranging?) that must be in place before you will even consider opening a trade and include every piece of information, every decision point, every possible contingency. The more mechanical you make your strategy, the more efficient you will be in trading it, and the less room there will be for fear and greed to intrude and undermine your success.

Risk/reward expectations
Set realistic risk/reward ratios for your trades. Risk/reward ratio compares the potential risk with the potential reward in a trade. Understanding your trading strategy is key to determining appropriate risk/reward ratios. Swing trading methods, for example, tend to offer greater risk/reward opportunities than momentum breakout methods.

Decide how much you are willing to lose on a given trade
Most traders choose to risk 1%-2% of their portfolio per trade. But your risk level should be based on backtests of your trading strategy, not on following what others do.

When will you trade?
Forex is a 24-hour market. Since it’s impossible to trade around the clock (unless you’re doing automated computer trading), you will need to focus your efforts on a particular timeslot. Ideally, you will be able to trade at a time that suits both your trading strategy and lifestyle.

Pre-market routine
You want to be as prepared as possible every day for what the market might throw at you. Your routine could include the following steps:

  • Review the daily news calendar
  • Review your open trades
  • Review the charts to be sure you’re on top of all potential opportunities
  • Reboot your computer to free up its resident memory (RAM).

Mental preparation
How are you feeling? Figure out what it takes for you to get emotionally and psychologically ready to do disciplined battle in the markets.

Keep records
If you don’t keep trading records, you can’t measure your performance. At the end of each trading day, analyze each of your trades. Always determine if you traded them according to your rules. If you didn’t on a particular trade, don’t count it as a win or a loss in the context of your trading system. That will skew your results. The other way to view this is that you should always stick to your rules so that you create a measurable track record and have a basis for continuously improving your trading results.

Be disciplined
Your trading plan is the solid foundation on which you will build your trading career. It must be well thought out and detailed. And you must be dedicated to sticking to it. Don’t second guess your plan in the heat of the moment, but make adjustments as necessary to continuously improve your results.

Good luck in your trading!

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