How to Plan Your Trade & Trade Your Plan

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Do your results suffer from any of these problems?

  • Getting “surprised” by trades
  • Confusion from too many inputs or opportunities
  • Lack of discipline
  • Entering into trades early

I could go on, but I’m sure you get the picture.

Good news – help is at hand in the form of an old adage: “plan your trade and trade your plan”.

Like a lot of trading wisdom, you probably know what this means on a superficial level. But actually implementing it takes a deeper understanding.

Making good trading decisions

The goal of planning your trades is that, in the heat of the moment, you’ll still be able to make good decisions.

Carefully thought out trades tend to work much better than ones taken on a whim in the fires of battle. If you fail to plan, all of your trades will end up as part of a scatter-gun approach that blows a big hole in your trading account.

The modern Forex trader is not a bank trader, absorbing multiple data inputs and placing dozens of trades based on an innate understanding of the markets. That era has ended. Now, a more systematic approach is required.

Don’t confuse stalking with planning, or planning with having a trading plan

Poor trading comes from poor processes.

Whether or not you succeed as a trader doesn’t hinge on your ability to recognize patterns – that’s the easy part. Rather, your success (of lack thereof) depends on how effectively you can eliminate mistakes and promote good overall decision-making.

Erroneous trading often starts with a confused approach to planning (conducting market analysis) and stalking opportunities. Planning your trades is a separate activity to executing your trades. Your trade planning is also separate to your trading/system plan.

If it sounds confusing, it doesn’t have to be. Essentially, you plan your system based on your model of the market. Then you plan, stalk and manage your trades, based on your system. It’s all very linear and logical. The following diagram illustrates the distinction.

DecisionMaking

Your market model is the big picture overview of how the market works. It is where you step back, identify and choose your edge.

Your trading plan is where your position sizing and trade implemenation rules are (or should be!) written down.

These are both done prior to you planning your trade. They are your preliminary work so to speak, providing an overarching framework.

Next, you conduct market analysis to identify where your edge is appearing. Once you identify your edge in real-time, you assess how to best trade it.

Then… it is time to be patient. Like a hunter stalking their prey, you wait for the optimal moment to enter the trade. Whereas your market model and trading plan are more general, you’re now looking for the best risk/reward ratio possible for this specific trade.

These processes are then overlaid with your mental strategies, so you remain open to the opportunities and changes in the market, and are better able to eliminate mistakes.

Finally, you conduct a review based on the insights and data you get from your trading. With this information, you upgrade your market model and improve your trading plan.

Putting it into practice

The key to trading your plan is to treat market analysis as a separate phase, outside of your trading time.

Schedule a time where you look for a set number of opportunities with very specific criteria. This is an important step, as you are not looking to trade every set-up or every candle pattern you come across. Rather, you are targeting a limited number of trading opportunities in order to achieve your return goals.

This could be one per day, or one per week, for example. The exact number should be determined during your trading system development, when you set objectives.

Once you scan the markets for viable set-ups, you then select those of most interest. If you are looking at placing one trade per day, you might narrow it down to one, two or three set-ups that you like.

You then want to write down how you will trade those set-ups. This includes:

  • Entry criteria
  • Position size
  • Stop-loss placement
  • Profit targets
  • Any other foreseeable exit conditions (how, when and why to pull the ripcord)

So you should know exactly where you will enter, how much you will trade, where you will exit with a loss and how you plan to farm profits. This should not be made up on the spot; it comes directly from the trading system plan – your overarching framework.

Next, you need to decide what to do if more than one of your entries is triggered. Do you take the first one and cancel the rest, or is there one that you would prefer to take, with the others as back-up?

You need to know exactly what to do here, or you will get confused and end up with sub-optimal trades. Remember: you are not trying to catch every move. It’s okay to let some go by.

Once you have completed your market analysis and identified the opportunity (or opportunities) you’re most intent on capturing, you then move to the stalking phase.

Stalking your trade

Wait for your exact pre-planned entry criteria to be fulfilled, and act decisively when they are. At this point, it should all be quite simple as your entry has been triggered and you have a plan for how you are going to trade it. It is just a matter of executing accurately. Failure in this area results in an execution gap. You can be a great analyst but a poor trader by failing to implement your trades in the correct manner, or by acting indecisively.

After the trade is entered, you then need to observe the market and respond appropriately to what is going on. This is where you run your trade management plan. If an exit condition occurs for any given trade, you simply follow the steps you have outlined in your analysis phase (again, based on your system trading plan). Anything else that happens, as far as you should be concerned, is just noise to be ignored.

Avoid being reactionary

There may be times where you think that you could or should have entered or taken profit. But unless they are part of your plan, these impulses should not be acted upon.

Note down these situations and assess them later on, when the blood is not running so hot.

The idea being that you can add to your market model and your wider trading plan later, once any observations have been rigorously assessed to make sure they are valid and worthy additions.

The next trade

You don’t need to wait to start “trading your plan”.

Why not try this approach on your next trade?

Do your homework to identify where you think the very best opportunity will be. (Hint: If you are unsure, look for trends.)

Then, write down your plan of attack for how to you will get the most out of this trade. Be precise in your plan – ambiguity is a killer.

Wait calmly for your entry conditions to arise, and act decisively when they do.

You may be surprised at how easy and effective this approach actually is.

 

About the Author

Sam Eder is a currency trader and author of the Definitive Guide to Developing a Winning Forex Trading System and the Advanced Forex Course for Smart Traders (get free access). He is the owner of  www.fxrenew.com a provider of Forex signals from ex-bank and hedge fund traders (get a free trial). If you like Sam’s writing you can subscribe to his newsletter.

 

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