How to Make a Trading Plan

Success in the markets is a function of discipline and most people simply do not have enough self-discipline to determine if they are trading emotionally or objectively. Trading is a business, so you have to treat it as such if you want to succeed. Before you start trading Forex markets with real money, you must develop your own trading plan, write it down and then test it in a Demo account.

Having a trading plan is one of the most important part of becoming a consistent profitable trader.

A trading plan is nothing more than a guide which will keep you on the disciplined trading path. It doesn’t need to be super complicated, it just need to have enough details to convince yourself to ACTUALLY USE IT.

Write your trading rules down and make sure that you can SEE & READ THEM EVERYDAY.

Some suggestions: Type your trading rules on your computer, print it out on a large piece of paper and place it on your trading desk or hang it on your office walls.

The most important building blocks for a trading plan are: Technical Analysis, Fundamental Analysis, Risk & Money Management Principles. Good knowledge of these topics will help you develop your trading strategy: when and how to enter a trade, how big your position should be, when to take your profits(or loss).

You also must take into account your personality: take time to do your self-analysis and get to know what are your strong skills and your weak points. Choose the strategy that is matching with your style and design your trading plan accordingly.

What goes in a Trading Plan?

Select the time-frame are you planning to trade

On of the very first decisions that you have to make is about the time frame that are you planning to trade. The time frame chosen will impact the charts and indicators that you may use for performing your Technical Analysis and also will impact on your Risks and Money managements rules.

Scalping , day trading, short term trading or long term trading?

The lower the timeframe, the quicker and more flexible you need to be in adjusting to changes – and the more likely you will get fake-outs, so be nimble and have your strategy fine tuned accordingly. Higher time frames will give you more time to adjust to changing conditions and your trading efficiency could be higher.

Also be aware that the markets behave differently at certain times of day – for example at the time when London or NY opens. Knowing this can be very valuable for your choosing you time frame for trading and when to trade.

Decide on what instruments you are going to trade

Usually for novice traders, it is advisable to stick with the major future indices and currency pairs such as EUR/USD or GBP/USD. As you become a more experienced trader you might decide to trade other instruments such a options, binaries or other currency pair.

Don’t be shy in exploring the full spectrum of trading instruments that your broker has it on offer to see what is going to best suit your system.

Define your trading strategy

Define your trading strategy ( for example Price Action, Technical Analysis, London Close, etc) and then write down the rules for the critical elements:

Set your goals: set realistic profit targets and risk/reward ratios; how much risk will you accept
Entry strategy: define the criteria for opening a position. It could be a manual entry based on a number of indicators, a signal provided by a signal provider or software or rely totally on automated trading
Size of your positions: how much to start with, how many positions you may have open at a point in time, how many different currency pairs – all of these are part of you money management rules
Exit strategy: where to take partial or total profit or loss
Other rules for adding to the position or use correlated pairs to hedge a position and so on

Define your trading rules

Make sure that your trading plan includes all the rules related to your actions ‘before’ and ‘after’ trading – everything related to the self-discipline you want to achieve. Having a defined set of rules rules it will create a trading routine. This will help you achieve the mental and emotional balance required for trading in the ‘zone’.

For example:

Take a walk of 15-30 minute before start trading – prepare yourself mentally for the trading day and put your mind in a positive state
Prepare for the trading day in advance for at least 30 minutes – look at the other markets, international events and schedule for news releases
Take a breathing exercise for 2-5 minute every hour to oxygenate and re-fuel your body
Stand up from your computer and stretch every 30 minutes while trading
I don’t trade if I am in an emotional state or if I am not feeling well
Stop trading if I had 4 losses in a row – the feelings of revenge, frustration, and disappointment can cause you to jump right back into the market with no real setup present, and you will likely lose even more money, and the cycle will continue

and the list can go on…. as many rules as you need.

Word of advice: there is no single strategy that guarantees perfect trades but there are strategies that work better in different markets. If you can devise a series of strategies for different market types, and then recognise the type of market you are dealing in, you will be a long way towards becoming a successful trader.