Category: 1. Own Trading Plan

The difference between making money and losing money can be as simple as trading with a plan or trading without one.

A trading plan is an organized approach to executing a trading system that you’ve developed based on your market analysis and outlook while factoring in risk management and personal psychology.

No matter how good your trading plan is, it won’t work if you don’t follow it.

Forex traders who follow a disciplined approach are the ones who survive year after year after year.

They can even have more losing trades than winning ones and still be profitable because they follow a disciplined approach.

Here is a summary of what the key benefits are:

• Trading that is simpler with a plan than it is without one.
• Reduced stress means better health.
• Ability to gauge your performance, identify problems, and make corrections.
• A trading plan helps to prevent many psychological issues from taking root.
• A trading plan that is adhered to strictly will reduce the number of bad trades.
• A trading plan will help prevent irrational behavior in the heat of the moment.
• A trading plan enables you to control the only thing you can control… yourself!
• A trading plan will instill a large measure of discipline into your trading. Gamblers lack both discipline and a trading plan.
• A plan will enable you to trade outside your comfort zone. How many times have you let a loss run and cut a profit short because it was a comfortable thing to do? A plan, executed with discipline, will help to prevent this from happening.
• A plan is your GPS which will enable you to get from wherever you are now to wherever you want to be: consistent profitability.
• Your trading plan is designed in such a way that if you do take a “wrong turn,” you will know about it very quickly and have the opportunity to correct the problem before losses spiral out of control.

One last thing before you head off to your next class…

Always remember that the trading plan is a work in progress.

The market environment is not static. It’s dynamic and constantly changing.  As things change, your trading plan must change, too.

Assess your trading plan and processes periodically, especially when you have changes in your financial or life situation.Also, as your research leads to changes in your trading system or methods, be sure to reflect those adjustments in your forex trading plan.

Adapt and survive.

Remember, the main purpose of the trading plan is to keep you on task and to operate in an effective and efficient manner to make good trading decisions.

It is, however, only as good as you make it, and it is completely useless if it is not applied in practice.

A forex trading plan is only effective if it’s followed.

You have to stick to it.

It sounds simple to do. It is really just common sense but most traders still can’t do it.

Why, oh, why?

Trader incompatibility.A trading plan should be a personalized plan for you, a plan that fits your own goals, risk tolerances, and individual lifestyle.

You must develop each component on an individual basis, never losing sight of the fact that it must be custom-tailored to YOU and YOUR needs.

Not your girlfriend’s. Not your boyfriend’s.

Not even Ronald, your weirdo best friend whose head is shaped like a hamburger who likes to wear pink polka dot pants and is an aspiring rapper.

Your trading plan must be made based on reality, not on hope.If you’re simply trying to copy somebody else’s trading plan or yours is based on false assumptions, then you will not be compatible with it and will have trouble following it.

SOLUTION: Be honest with yourself. Then revise your trading plan.

Trading plans are intended to be long-term.

Many forex traders give up on their trading plan, or often more specifically, the trading system in the trading plan.

Why?

They are unable to endure a string of losses. Rather than sticking it out through the inevitable rough times, they give up.

SOLUTION:: Be patient!Trading according to a plan requires sticking to it through thick and thin. That takes discipline. Rock solid discipline.

Forex traders lacking discipline do not stick to their trading plans. You need to be disciplined. Rock solid. Does it sound like we’re beating a dead horse? Well, good.

SOLUTION: Stay disciplined!

Self-destructive behavior: Some forex traders have deeply ingrained psychological issues that will sabotage them.

This can be resolved with hard work on one’s self, but the trader must be self-aware of such issues first. You can’t figure out a solution if you don’t know the root problem.

When you stop following your trading plan, you become rewarded for a lack of discipline and you may start believing that abandoning a trading plan is no big deal.

An unjustified reward may increase your tendency to abandon trading plans in the future. You may be prone to think “I was rewarded once; maybe I will be rewarded again. I’ll take a chance.”

But the positive outcomes of undisciplined trading are usually short-lived, and a lack of discipline ultimately produces forex trading losses.

Distinguish justified wins from unjustified wins.

A justified win is when you create a very detailed trading plan and FOLLOW the plan. A win that results from following a trading plan is justified and reinforces discipline.

An unjustified win occurs when you drift from or completely ditch the plan. You might be rewarded, but the outcome occurred by chance.

You might as well flip a coin or hang a printed copy of your charts on the wall and throw darts at it to help you make trading decisions. The win is unjustified and can reinforce undisciplined trading.

SOLUTION: Look in the mirror. Hopefully, you don’t turn to stone.

If you’re personally having trouble sticking to your trading plan, most likely it’s one of the reasons above. If it is, refer to the solution below it.

Consistency is key!

Maintaining discipline is vital for consistent and profitable forex trading.

Trading is a matter of getting the law of averages to work in your favor.

The winning trader is one who first develops the skill to make the shot consistently so that at every possible opportunity, the ball is likely to go through the basket.

One must trade consistently following a specific trading plan on each and every single trade.

If you trade one approach this time, and a different approach at another time, your performance will likely be all over the place, too.

What’s more, you’ll have a more difficult time pinpointing which strategy works and which don’t.

With discipline comes profitability. Don’t let unjustified wins interfere with your ability to maintain discipline.

Follow your trading plan, and cement in the mindset that if you follow your plan, you will end up more profitable in the long run.

One of the leading causes for the failure of many businesses is their lack of planning.

If you want to be successful in life and business, you need to have a plan for how to obtain that success.

Trading is no different from any other business.

It is important to have a written business plan for your trading just as you would for any other business.

Like we mentioned in the previous lesson…

“If you fail to plan, then you’ve already planned to fail.”

In other words, those who fail to plan out their trading like a business are doomed to fail.

Here are twenty-one crucial questions that you should have an answer to as part of your trading plan.

1. What are your specific reasons for wanting to become a trader?
2. What do you hope to gain from trading? 
3. What are your biggest strengths?
4. What are your biggest weaknesses?
5. How do you plan to address your weaknesses and leverage your strengths?
6.  What are the things that are going to separate you from the large majority of traders who fail? (Answering with “hard work” isn’t enough. Lots of hard-working traders still fail.)
7. Will the things you mentioned above actually give you an edge in the markets so your trading outcomes generate a positive expectancy?
8. What market or markets do you plan to trade and why?
9. How much time can you devote to actively following the FX market? And the overall financial market?
10. What is your trading style? Do you plan to scalp, day trade, swing trade, or position trade? 
11. Does the trading style(s) you’ve chosen reflect the reality of the amount of time that you can devote to trading?
12. At what times throughout the day (or week) are you going to spend actually trading, researching trades, and then learning about the market?
13. What trading system(s) will you be using (your criteria for entering and exiting trades)?
14. What is your risk management strategy?
15. How will you know if your trading system or strategy stops working?
16. After you’ve identified that your trading system or strategy has stopped working, what will you do to address it?
17. What trading software and equipment you will use to trade and how much is it?
18. Who will you use to access the markets? What broker(s) will you use?
19. How much money do you plan to start to trade with? Is this money you can afford to lose without negatively affecting your current standard of living?
20. Do you plan to add money to your account and if so where is that money going to come from?
21. If you are profitable, do you plan to reinvest profits or withdraw some or all of them?

If you’re really serious about trading, take time to ponder the questions above.

Growth and success need direction and a sense of purpose. Which must first be identified and clearly stated. They won’t appear on their own.

A clear roadmap forces accountability and responsibility, which sometimes may lead to a change in the plan (like when your trading system or strategy stops working). Which is fine, but you won’t know that change is even needed unless you’ve established in clear terms, what is considered “working” and “not working”.

Risks can be turned into opportunities, but first, you need to have identified what the risks are. If not, when they arrive as a crisis, you’ll be on your back foot, most likely panic, and make poor (and unprofitable) decisions.

As you can see, there are many things to consider before hitting that buy or sell button in your trading platform. 

Answering each question will not guarantee trading success, but NOT answering such questions will almost certainly guarantee failure.

The choice is yours.

Results are usually proportional to the quality of the planning.

Don’t set yourself set up for failure. Set yourself up for success.

What “toys” will you use for your forex trading profession?

Write down the hardware, software, data feeds, furniture, and internet access that will comprise your currency “trading desk.”

Don’t forget backups! Make sure you have a backup plan for everything just in case your main tools fail while you’re in a trade.

What if your computer crashes and doesn’t boot back up?

What if your internet connection goes down?

What if your electricity goes out?

What if your keyboard stops working?

Finally, don’t get suckered by all the razzle-dazzle currency trading vendors (*cough* scammers! *cough*) try to lure you with.Do you really need that $5,000 chart pattern recognition software that displays in 4D IMAX?

Probably not. Save your money and use it for trading capital instead.

Which broker platform should I use?

Where will you execute your trades? It’s not like you can call the bank and say, “I want go long EUR/USD.”Okay fine, you could have done this in the past (if you had a million dollars), but we’re living in the 21st century now.

Time to get up to speed and use those online trading platforms!

But it isn’t that simple.

Make sure you know the ins and outs of the broker you choose from executing orders to depositing and (hopefully) withdrawing money.

Take the time to read our “Choosing a Forex Broker” lesson. You won’t regret it!

What is your daily pre-trading routine?

Waking up doesn’t count.

Having a pre-market routine is important.

Don’t think you can just jump out of bed, plop in front of your computer, fire up your forex broker’s platform and start easily grabbing pips as if they were apples from a very short apple tree.

What activities will you do BEFORE you start trading?

We don’t mean showering and brushing your teeth.Although you should always take a shower and brush your teeth. You don’t wanna smell like Pipcrawler now do you?

Your forex trading routine should help you accomplish the following tasks:

• Reviewing any open positions and making any necessary adjustments
• Reviewing yesterday’s trades
• Getting yourself “up to speed” on the market
• Identifying any upcoming news that could cause volatility
• Being ready to trade when the next trading session opens

Now you will want to review the overall market news. This can be done online through sites such as Bloomberg or through television (CNBC, Bloomberg TV, BBC).Determine what the overall market sentiment is for the day, review yesterday’s trades and how the previous trading session finished, and maybe identify key market areas like support and resistance.

Now it’s time to start trading your system!

Your pre-market routine will be critical to your success as a trader.

It will help you plan your day so that you are not spending time during market hours scrambling trying to figure out what news or data will be coming out, and what to do if the market does something you didn’t expect.

You want to start your forex trading session feeling calm, relaxed, and prepared for whatever the market throws at you.

Keep up-to-date with both the fundamentals and technicals affecting the forex market.

Use our economic calendar.

A forex trader in the dark is a forex trader in the red.

I want to make some money!

Ahhh. Of course, anybody who’s interested in forex trading certainly has ambitions of raking in some dough.

Trading involves risk, and we expect to be compensated for those risks.

There’s no doubt that every currency trader expects to make a profit.

The questions that you should ask yourself though are this:

What kind of returns do I expect to make? And how much risk am I willing to take to get these returns?

Your answer to these questions will play a huge role in determining what kind of trading style you will implement, what currency pairs and times you will trade, and most importantly, the risks involved in achieving your goals.Let’s look at an example to help explain this better.

Mario and Luigi

Let’s say there are two forex traders, Mario and Luigi.

Luigi is looking to score 10% a year while Mario is a little more ambitious…

He wants to DOUBLE his account and make 100% returns!

And marry a super hawt princess.As you can imagine, a trader like Mario, who is looking to double his account, is in a very different situation.

It is very likely that Mario will have to take a lot more trades and/or risk more than Luigi.

He will have to expose himself to more potential losses if he ever wants to achieve his goal of 100% returns.

Traders will also have to take into consideration drawdowns.

A drawdown is normally calculated as the distance from the highest value of your account to the next lowest point. (We’ll explain this a little bit more in a later lesson. For now, pay attention in class!)

Each forex trader must decide how big of a drawdown he or she can accept in order to hit their profit target goals.

On the one hand, there are forex traders who are risk-averse and would rather have small drawdowns. The tradeoff is that this will also limit potential profits.

On the other hand, there are forex traders who are comfortable with large drawdowns, just as long as their system also yields huge returns.

You will also have to take into consideration how much time you can dedicate to trading.

If you can’t dedicate a significant amount of time working on your trading system, reading up on the financial markets and learning new trading techniques, recording/reviewing your trade journal, then we can guarantee you that you will have a difficult time hitting your goals.If you can’t make this time commitment, you may have to readjust your expectations as to how much you can make your account grow.

In the end, just know that success depends on YOU.

Do you have the discipline to GRIND it out consistently to tweak your skills and gain the experience needed to navigate the markets?

If you don’t, then expect inconsistent returns, if any at all, over the long term.

You need to seriously consider how much trading will affect your current lifestyle.

How much time each day/week/month (whichever is most appropriate) can you dedicate to the various requirements of forex trading and managing a trading system?

Your time availability should determine your trading style.

The shorter the timeframe you are trading, the more time you need in front of the charts.If you’re a day trader, since you’re entering and exiting trades throughout the day, you need to be glued to the screen the whole time.

The longer the timeframe you trade, the less you have to watch the market. You can simply check your trade from time to time.

Don’t forget about distractions!

When you say you can trade currencies for 8 hours a day, does that mean 8 hours of your undivided attention staring at charts and analyzing economic data releases?OR does that mean 8 hours of staring at charts, analyzing economic data release while cooking your Honeybun some breakfast, juggling knives, playing with your kids, watching BTS on YouTube, following Taylor Swift on Twitter, stalking someone on Facebook, and saving the world from the forces of evil?

Because if you were a scalper, you’d probably missed a lot of entries and exits, and end up instead scalping your own head due to your many losses or missed winning opportunities.

You also need to dedicate time to developing AND tweaking your trading system.

Trading your system will require you to stare at charts looking for possible entries.Once you’re in a trade, you then need to manage it.

After you exit, you need time to review your trade and look for ways to improve.

And then you need time to write everything you felt and did in your trading journal.

How much time you’ll need to accomplish all of this will depend on your trading system.

Naturally, your forex trading system needs to factor in how much time you can dedicate.

This is all assuming you only have ONE trading system.

You should repeat this process for every trading system you wish to trade.

Whatever “operating hours” you decide, just make sure you’re able to commit to it consistently.

How are your personal finances?

You need to determine if you can even afford to trade.

Forex trading should only be done with risk capital.

Risk capital is money that, if lost completely, would not have an overly harmful impact on you financially.

Risk capital is money that you can lose.This is the kind of money that if you lost, you wouldn’t lose your home, car, spouse, limbs, electricity, etc.

Don’t risk what you can’t afford to lose!

If you’re playing with money that you need to pay the bills, it will have a huge negative impact on your ability to make objective trading decisions.

Imagine how stressed you’ll be while your trade is open knowing you might not be able to put on the food on the table if you get stopped out.

Every time a pip goes against you, you’ll be thinking, “There goes tomorrow’s lunch!”

You don’t want to end up starving, homeless, and broke now, do you?

Unless you do.

In that case, go ahead and risk all your hard-earned money in forex.

Don’t be stupid!If you can’t afford to make dough in the kitchen, then you can’t afford to make dough in the forex market.

Use your brain.

Don’t start trading forex with real money until you’ve accumulated enough risk capital. Until then…

Stick to demo trading!

Later on, we’ll teach you all about risk management and how you should manage your risk capital.

Why do you want to become a forex trader?

Is it to become filthy rich? Is it for the thrill?

Is it because you want to do something challenging and exciting?Is it because the girl you like trades currencies and you want to impress her?

It is important to know what your true motivation is, or whether you should even be trading at all.

Forex traders who aren’t serious or committed to the craft will be quickly eliminated by the market.For example, seeking thrills and seeking consistent profits don’t go together.

You might enjoy the thrill of putting on a humungous “I’m betting the farm” position, but believe us, you won’t be smiling once your trade blows up in your face.

If thrills are what you seek, go to a casino, jump out of a plane or try driving an F1 racing car.

Better yet, if you want a real thrill, drive an F1 racing car out of a plane and land in a casino.

Now that’s a real thrill! And you might even lose less money than if you were trading.

What have you determined to be your goal(s) for trading?

This can be expressed monetarily using a profit goal (either in currency or percent return) per unit of time.For example, you might choose a goal like making $4,223,834,145.53 per month, or achieving a 529% return every week.

This doesn’t necessarily have anything to do with money.

Like “My goal for trading is to make enough money to be able to buy them new Space Jam Jordan 11s so I can impress my lady crush and she can fall in love with me and we can live happily ever after.”

Or “My goal is to have enough money to have plastic surgery so that I can look like Halle Berry and have everyone eating out of my hands.”

Okay.

We lied.

Everything has to do with money.

Whatever you decide, just make sure it’s specific and measurable.

Set trading goals that will help you develop as a trader.

It can’t be vague like “I want to be rich”.

Changing it to “I want to be super rich.” does not count.Be specific!

“I want to make 1% every week.”

“I want to be winning 50% of the time by the end of this year.”

“I want to double my account in six months.”

“I don’t want to make any trading mistakes for the day.”

By making your goals specific and measurable, not only will you know what you really want, but you’ll be able to monitor your progress and see whether you are improving or not.

If they are not specific, you’re just wasting your time.

The first step in building a trading plan is to realistically take a holistic view of yourself.

The foundation of your trading plan starts with your self-reflection because you will be the only one using it.This self-reflection will reveal your trader profile, which is basically who you are as a trader.

Who you are as a trader will define what kind of method suits you.Trading strategies, systems, and methods that aren’t compatible with your profile and personality will drastically lower your chances of success.

While most traders want to immediately jump into creating or finding trading systems and strategies, they won’t know which ones match their personality and unique situation if they don’t spend some time on self-reflection first.Before you think about clicking the Buy or Sell button on your trading platform, there are some questions you should ask yourself so that you can better form your trading plan.

While you’re at it, you should write down these answers.

Writing down your answers will help remind you of what you’re going to do and help make sure you stick to the plan.

Now, are you ready for some Q&A?

In the following sections, we’ll go through some questions that should make clearer what your trading profile is, and how it will shape your trading plan.