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Posted on Feb 28, 2019 at 06:09 PM
Your Goals are important. You can't say my goal is to make money, you have to be more precise. You may create something like this. Short Term Trading Goals: To make consistent profits each month and supplement the monthly income from my job. To be a patient and disciplined trader who follows my plan. Long term trading goals: To build my trading account up to $25 000 through mastery of my trading strategy, patience and the discipline to follow my trading plan every time I trade. To avoid over trading, be patient, remain disciplined and stick to your plan always. A goal without a plan is just a wish.
It might be a little difficult to find 20 traders who have a trading plan unlike business owners who generally have a business plan in order to provide a strategic vision to employees and to stay focus on their primary line of business; most traders never take the time to create a business aka trading plan.
As a Forex trader, you need to see your trading activity as a business that you create structures and processes for.
10 Elements of a Winning Trading Plan
Here's how to create your own trading plan in less than 10 minutes just by answering a series of 10 simple questions.These are tried and tested principles that will work for any active trader.
In some line of business, time is the main driver for evaluating performance. Some companies report on a quarterly basis or even half yearly. They gather data and work with these data to assess the company’s future
How long should you wait to evaluate your trading performance... yearly, monthly and daily?
Base your evaluation period on the number of trades placed and not by the amount of time passed.
You may decide to do this on every 5 trades or more or even set a particular day on which you would not place a trade but use for analysis. The most important thing is to do this and set a deadline date.
The way to address the tracking of your performanace is to create a set number of trades that you will evaluate against key performance metrics.
You will need to identify the right number of trades you want to evaluate but this number needs to be high enough so that you have a decent sample set, but low enough to prevent you from going on a destructive trading binge.
2. What is the Number of Trades to Use When Evaluating Your Trading Activity?
You need to Identify your Key performance metrics.
Measure your trade by how much profit you made and how successful they were based on your plan.
For example; R is the ratio of your profitable trades divided by your losing trades. Over a 10 trade cycle, $15000 wins/ $5000 lose which would equal an R of 3. This essentially translates to the fact that the profit is 3 times more than the lose.
You will want to measure R over ever cycle. There is no set minimum or maximum R value, however you will wantt to track your performance over time and quickly identify when you are below your historical average.
Maximum Draw Down
This is the lowest intraday dollar value of your account within a trading cycle. Most max drawdowns require a new high to take place in order to mark the drawdown. I howver feel this is not the right approach, because it could take you a series of trading ccles before ou hit a new protfolio high.
Determine how low your account has gone from the starting point of the cycle in percentage terms. For example, if I have a starting portfolio value of $10ok for a 10-sprint cycle and my account value hits $80k, then my max drawdown was 20$. Just like R, there is no hard and fast rule on maximum drawdown.
Over time, you should aim to reduce your drawdowns, as this will ultimately lead to a portfolio balance that continues pointing up and left, with very little pullbacks.
Are you a day trader? Then decide on the duration of hours you would trade and stick to it. How many hours would you do? 2hours? 4 hours? 6 hours?
Whatever time you decide on, ensure you stick to it.
Sometimes you might see a very good trade but if it doesn’t fit into your trading plan, then put it aside.
4. Define Your Trading Edge
Similar to the times of the day you will trade, keep your trading edge down to one or two setups when starting out. The more strategies you hope to master, the more difficult it will become to consistently make money in the market.
A Forex trader’s trading edge may include early range breakouts, high volume, tight spreads, consolidation prior to the breakout and the time to enter new position.
Go ahead to make your own list. If you feel your list bubbling up to 20+ criteria, you will drvie yourself crazy trying to respect all your rules.
Don't over complicate it.
Generalize and then find valuation processes but identify assets to trade and then develop a standard methodology for identifying plays.
First ask yourself, what is my time horizon for this trade?
Day traders may want to focus on events in the news while long-term traders may focus on securities that are developing new growth or business that show the potential for multi-year growth. Whatever your trading style, make sure you identify the plays that have the highest odds of profitability.
For day traders, you may want to focus on the market movers. This provides you the greatest opportunity for locating stocks that are trending hard with high liquidity.
This is a significant part of your plan.
Before you decide the type of strategy you want to stick to, you should have multiple strategies for multiple type of market or have a strategy that you like to use and identify the kind of market it works well for.
When the market fits your set of rules,then your trading strategy works and you would be able to deploy your trading strategy. E.g If your strategy works well in a range bound market, this is what you're looking for because in a trending market that strategy might not work
You need to first determine the condition the market is in; is the market trending or consolidating?
Identify the general direction a market is moving and try to trade with that direction. Look for higher highs and higher lows in an uptrend, lower highs and lower lows in a downtrend. For consolidating the markets,we are looking for a market that is consolidating between an obvious support and resistance level so in your trading plan you might have a picture like this or similar to remind you of what you generally should look for.
Determine the Core Daily Support and Resistance Levels and Draw them on the Charts.
After determining whether the market is trending up, down or consolidating sideways, you need to draw in the core support and resistance levels on the chart.
These are going to be the confluent value areas that you watch for price action strategies to form near to trade back in the direction of the dominant market momentum or in the case of a consolidating market, towards the opposite boundary of the range.
Look for price action signals that have formed at confluent levels in the market, make sure to trade only very obvious and confluent setups.
You have to know exactly what price action strategies you are looking for before you build your trading plan.
Before we see an example of a bearish pin bar strategy in a down trending market. You should have images of ideal examples of each trade set up you plan to trade within your trading plan, this will help to remind you what high probability setups should look like.
Stop losses are not a negative thing; stop losses are what keep you in business over the long haul.
Your stop loss should be based on your risk margin.
If you discover that your stop is consistenntly being hit, then you need to take a deeper look into the volatility of the stocks you are trading.
Some Forex traders’stop loss is once the position goes against me them by 2%. The 2% threshold is based on the volatility of the commodities trade and may not be suitable for your own trading style.
The point here is jst to make sure you have a stop loss.
The market wizards will always say ' Let your winners run.
The problem with this is that this might result to greediness which will prevent traders from closing their winning trades even after hearing that little voice in their head telling them the run has come to an end. The way to avoid this scenario is to have a clear exit strategy.
Keep it simple. The exit strategy should be as simple as when the asset crosses belo wa moving average or when an indicator moves into overbought or oversold territory. Whatever it is, define it in your plan.
Without money management, you will not stand a chance of making it in the business of trading.
For me, the amount of money I can use per trade largely depend on how well I am performing.
If I am going through a rough patch and my key perfomance indicators are down then I use less money to mimize the damage to my account balance.
However for keeping it simple in this article, I only use 10% of my available day trading buying power per trade. For example, If I have $250 000 cash, this would trnaslate to $1 000 000 in day trading buying power; hence I would use $100 000 per trade.
When will you take a break form trading? Sounds like a no brainer but not many traders seem to know when to take a break.. Whether the trader has just had the best series of trades or an all-out massacre of their account, the vast majority of traders just keep placing trades, day after day.
You may consider taking a day off from time to time to relax and reflect on your trading activity.
The major exchanges and prop firms think in terms of limit up and limit down. For prop firms, their risk management rules will closely monitor how much a trader is up or down for the day. Once a trader reaches a particular extreme based on their past trading performance, this trader is not allowed to place any additional trades for the day.
Why do we as traders not think in terms of limit up or limit down?
For me, if I lose 2% of my trading capital at any point of the day. I need to exit all positions and go to sleep. Conversely, if I make 7.5% of my trading portfolio in one day, it is time to see a movie.
The Success Factor
For some reason, some Forex traders have fooled themselves into thinking that successful trading only boils down to the latest algorithm or technical indicator. This is so far from the truth.
When you are trading, you may forget that there are human beings on the other end of the buy or sell transaction. This is a head to toe competition to see who is right - the bulls or the bears.
Part of the game of trading is not revealing your hand. The smart money will constantly force sharp moves up or down in order to throw off the little guy before the big move.
You are probably asking yourself, what does a positive attitude have to do wth any of this.
While everyone may have stop loss orders, technical indicators, charts, access to news, etc. Thre are some traders who are able to translate all of this information into successful trading a.k.a money.
Keys to Success
This success factor begins and ends with a winning attitude. Think about it, when you see your stock have a short hiccup in a current uptrend, is your first reaction to sell to lock in your profits or do you move your stop so quickly that you are basically begging the market maker to trigger your order?
the winning trader will see the same price movement as you, however he or she will not interpret this information negatively. They will see a slight pullback
the winning trader will see the same price movement as you, however he or she will not interpret this information negatively. They will see a slight pullback in an uptrend as healthy price action and will comfortably watch the chart move without a negative emotion in their body.
Their ability to sit through these corrections does not mean they have a lack of monney managerment principles, it just means they believe the market will go in their favor as long as the correction or counter moves do not damage the overall trend.