FYI | Dec 21 2011
By James Stanley, Trading Instructor
The Trader's Plan
“Good fortune is what happens when opportunity meets desire.”
- Napoleon Hill
Finding quotes exuding the benefits of planning is not hard to do. Above are just two of the more common, reverent quotes exalting the benefits of planning. Or there is this one:
“He who fails to plan, plans to 1.”
In the Money Management module of the On-Demand Video Course, we recommend a minimum of 2:1 or greater; meaning if I’m taking the same trade with 100 pips of risk as above, I’m looking for a minimum of 200 pips to the upside if I’m correct.
How am I going to enter trades?
This is one of the more simplistic parts of the trading plan, as this will often be dictated by the trading strategy (or strategies) itself. I want to make sure that I’ve written out the exact situation that I am looking for.
If I were using the ‘Model Strategy,’ that David and Tim had used in “When is the Best Time of Day to Trade Forex?”this section of the trading plan would read:
I’m looking to trade RSI crossovers between 2:00 PM EST and 6:00 AM EST
I want this to be as descriptive of the strategy as possible in this section.
How am I going to exit trades?
A natural extension of the previous section, this area should address each strategy being traded. For each strategy listed in ‘How am I going to enter trades,’ I want to have an exit planned.
Some exits may be: “I will close my trade when 2 times my initial risk level is trade.”
How am I going to manage my trade(s)?
Once again, this area is going to differ greatly between traders as this should be highly customized based on the previous sections of the trading plan. This can also be built around the specific strategies or market conditions being traded.
Trending moves can often continue for an extended period of time, meaning trailing stops may be more of a requisite option in trending/breakout markets than in ranging environments.
For traders looking for more information, I share my point of view in the article “In-Trade Management.”
Rules
I saved the best for last.
This is where I will build and manage my personal ‘rules,’ of my trading approach. If I find myself continually running into an issue or problem, the only rational thing to do is identify the issue and build a rule around it. That’s where my personal rules come into play.
These will differ greatly amongst traders, but as an idea, one of the rules that have existed on my plans for quite awhile:
“I will not throw good money after bad.”
This means that if I open a trade, and am losing – I will not add to that loss.
It also means that if I set my stop, and the trade moves against me – I will not, under any circumstances, ‘widen,’ the stop or give it more room in the hope of being right.
I noticed this deficiency in my trading quite awhile ago, built a rule around it, and have kept it as a reminder. I encourage you to notice what areas of trading are causing you difficulty, and address them in this section.
Research Referenced in this article:
“What is the Number One Mistake Forex Traders Make?”
“When is the Best Time of Day to Trade Forex?”
“In-Trade Management”
Money Management module — On-Demand Trading Course
The views expressed are not FNArena's (see our disclaimer).
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