You can almost track the moment when a seismic shift occurs in the development in mankind.
Whether it was the move to walk on two feet, the invention of the wheel, or the use of perspective in art, when the big changes occur, they literally change everything.
And so it is with the development of traders.
Every trader starts with the intention of watching markets and somehow using intuition to guess when there is about to be a sudden rush higher or a rapid change in sentiment.
But, sometimes quickly or more often slowly, traders discover that their intuition isn’t much good against the weight of money and insight employed by the world’s best traders.
And it’s at that point they start to think that maybe all that talk about having a trading plan might be useful for them as well.
How’s your plan coming along?
We don’t know for sure, but the odds are that if you’re trading forex, you have no plan whatsoever. How can we be so sure? Trust us. Most don’t.
In fact, most traders don’t even use stop losses, let alone have a plan to take profits. It’s the reason so many traders fail when they initially start trading.
But traders that are successful over the long term inevitably have a plan.
What do you need in a plan?
If you’ve been trading forex, or anything, really, you’d know the main problem is keeping control of your emotions.
It’s all very well thinking what you would do in theory, but when you’re in the middle of the trade, something very often goes wrong with your brain. Before you know it you’ve made ten bad trades in a night and you can barely remember making any of them.
What’s in the plan?
Every trading plan consists of five parts.
The first part of a plan is to decide what forex pairs you would consider trading. Not all forex pairs are created equally. While the USD/JPY and USD/CHF see very little volatility (and could well bore you do death), the GBP/JPY and EUR/JPY are so volatile they are known as the ‘trader killers’.
Instead, look for currency pairs that have moderate levels of volatility, like the AUD/USD or the EUR/USD. And don’t be afraid to trade just one pair.
The second part of the plan is to decide what why you would consider going long – or why you might go short. This is one of the most crucial parts of the plan. There needs to be a strategy behind this – and it needs to be a lot more than “it can’t fall much further”.
This part of the plan while take you a while to develop; in fact, you should continue to work on your plan until the day you stop trading.
The third part of your plan is to decide where you will enter and your two exit levels: the stop to protect losses and your profit target. The most common level to execute a trade entry could be to buy on a break above resistance or sell on the break of support.
The fourth part is your lots size. How large will you position be? This is the final part of the trade construction puzzle and there’s a reason we leave it until the end. The size of your position should be reliant on where your stop is placed. The reality is, if you don’t know how far away your stop should be, you have no idea how large your position should be.
Finally, the last part of the plan it to execute and then monitor your trade. The vast majority of amateur traders will usually make this right at the beginning. It’s your classic case of “shoot first and ask questions later”.
Make it mechanical
Many traders find that even after all their planning they still fall prey to the whims of emotion. But that’s no reason to give up.
In fact, many of the best traders had to overcome this difficulty. And, moreover, it’s this problem that helped them make the major breakthrough.
They do this by giving up on participating in the minute-to-minute frenzy of trading. Instead, the advances in modern technology allow you to place your orders, turn off the computer and let the market take care of itself.
If you’re not watching the market it far reduces the opportunity for you to sabotage yourself.
Many traders fear leaving the market to do its thing. They’re desperate to watch the action in case they have to make a decision to exit early. But you have to weight up whether you actually make good decisions those circumstances. If you don’t, accept the fact. Set your stops and targets and take yourself out of the equation.
Once you’ve made this decision, you can really start exploring your options.
There’s a world of opportunity for traders that take a mechanical approach to the market. Many brokers allow you to program orders to execute day after day after day.