Hello Forex Traders,
Today’s goal is to show what 7 elements are the building blocks for an awesome trading plan. This process is critical as the key to success is formulating a trading plan with an edge and then implementing that edge consistently and with discipline. Plan the trade and trade the plan is truly the way to Forex success in 2014.
Creating an edge is a vital part of becoming successful. Not just any edge though, Forex traders need a winner’s E.D.G.E.:
1) E for entrepreneurship and expertise – treating trading as a business and showing accountability and building expertise in your field
2) D for direct & defined goals - having and working on SMART goals and a business plan
3) G for game and trading plan - creating a plan that can capitalize on E and achieve D
4) E for excitement & energetic mind and body - being (mentally & physically) prepared for implementing D
Read more here why a trading plan is important. Here is another article explaining the important of a trading plan.
With that said, let us take a look how Forex traders should approach point 3 / letter G of the Winner’s E.D.G.E. Here is a list of articles to help you with trading plans:
1) The Motivational Driver -> why do you want to be a Forex trader?
Why is it important to be, become, and remain a success Forex trader? What do you want to achieve with it? What is your vision and mission? Why is success important? And what will you do with it?
Write down your strong driving forces why you must succeed and what your expectations are for the process of reaching success and once you have reached success. Typically you want to think of motivational reasons that really drive you and provide you a mentality that “failure is not an option” and always keep you focused, energetic and motivated.
2) The Current Situation - know thyself
Knowing your strengths and weaknesses, your own pitfalls, emotions during stress, and characteristics & personality in general are crucial stepping stones for future success. The reason is because without proper syn-energy between your trading plan and your mental framework, the less chance of success. Forex traders must build a trading plan that is executable within their trading psychology.
a.) The best way to start is by evaluating oneself via :
- SWOT analysis (Strengths, Weaknesses, Opportunities, Threats)
- Color personality test.
- Read more about that here.
b.) If you have some Forex experience, then you can continue with this step. If not, then you will need to find out more information by talking to other Forex traders, to a Forex mentor, and via trial and error. The next step is to:
- Judge what your beliefs are of the market.
- Judge the current mindset about trading, market, yourself, business, and opportunities.
- Judge what type of trader you are and what trading style suits you. (long-term, swing trader, intra-week trade, intra-day trader, scalper)
- Judge what type of market environment you like to trade. (Reversal, trend, range)
- Judge whether you will use discretionary or non-discretionary trading method. If the former, what tools, parts, concepts are allowed discretion?
- Judge what types of analysis you will use (fundamental, technical, sentimental, chaos)
- Judge the time availability that can be dedicated to the business.
- Judge when can be traded, how often can be traded, how often the trade management can be monitored.
- Judge what instrument(s) to trade (Forex, currency pairs, Futures, etc).
- Judge what levels of risk you are willing to take and feel comfortable with.
Read more here on how to build a trading strategy.
3) Your Desired Target - formulate SMART goals
Formulate goals that are SMART, which means Specific, measureable, achievable, realistic, and timely. Being making goals SMART, Forex traders are able to measure whether the targets have been reached or not. Read more about SMART goals here on our website. But also this wiki link is useful for an easy 5 step approach.
Goals can setup in terms of the following:
a) Profitability targets
b) Drawdown and risk limitations
c) Balance between profitability vs drawdown and risk limitations
d) Educational goals
e) Trading method goals
f) Trading psychology goals
4) The Vehicle for Reaching Target: Action Plans - formulate sub goals and evaluations
It is impossible to reach the desired goals without creating a plan to get there. The plan must incorporate smaller sub goals which break down the bigger goals into smaller, doable and workable steps. A Forex trader must then intensively work on implementing the road map. Without proper dedication the goals will never be reached. Then of course a Forex trader needs to evaluate and monitor the completion of this process to make sure they are on the right track – and if not, then the trader needs to readjust the road map to make it more realistic.
So here is the process simplified:
- Create sub goals and a road map with a to-do list and action plan to reach sub goals
- Work on action plan intensively (preferably as often as you can)
- Evaluate process and goals regularly
- Adjust road map and targets if need be
In this process the following documents are very important:
a) Vision and mission statement, goals, SWOT
b) Motivational documents
c) Trading document (or trading plan / plan how to trade)
d) Risk management rules
e) Trading journal
f) Evaluation form of trader
5) The Method of Trading - formulate the document which specifies trading rules & guidelines
Usually this is the document which Forex traders start with, before in fact completing steps 1-4. In this document a Forex trader must state all these items:
a) Which strategies they will trade and mention all of the rules and guidelines of each one.
b) What risk management parameters are used.
c) What tools and indicators are always used and how are they used.
d) What tools and indicators are occasional used and how are they used.
e) What time frames are used for the strategy or strategies.
f) Will you use multiple time frame analysis.
g) How does one define the trend.
h) Which filters are chosen.
i) How do you define support and resistance and will you use it.
j) How does one define an opportunity.
k) What is considered to be a trigger.
l) What is considered the best stop loss and take profit.
m) What are the money management expectations (connected to trigger, stop loss, take profit).
n) What entry methods are used.
o) What exit methods are used.
p) What is the position size.
q) What is the trade management.
Read more here about building a strategy part 2.
6) Non Breakable Rules - these are goals and rules every Forex trader should have
Here is a list of potential rules that are non-breakable. Of course this depends from Forex trader to Forex trader, but here are some examples:
a) Always preserve the capital
b) Always use a stop loss
c) Always predefine the risk before entering a trade (in terms of stop loss and risk %)
d) When trading, always focus on the process and not on the outcome
e) When trading, keep an eye on one’s emotions to judge whether continuation of trading is desired
f) Always complete evaluations at the end of the trading day / week and review them periodically
g) Execute trading plan without fear, hesitation, and hope, and with patience and discipline, and with a balanced greed.
h) Plan the trade and trade the plan.
7) Playing out the edge - your daily routine
When a Forex trader has completed the entire process of creating trading plan (hopefully the full version as indicated in this article), then the next step is to implement the plan day in and day out, week in and week out, and finally year in and year out. This might seem monotonous to some. However, this process is important in achieving profitability in the long run with consistency.
To achieve this, a Forex trader must implement the trading plan as correctly as possible. Also the Forex trader must evaluate the implementation process. Simply put, there are only 2 reasons why a Forex trader could encounter losses in the long run:
1) The trading plan has lost its edge – trading plan needs adjusting
2) The trading plan is not being implemented correctly – trader needs to work on executing
All Forex traders can do within the heat of the trading, however, is implement the trading plan correctly. Only after actual trading and during the evaluation (preferably after a substantial and sufficient time period) can a trader judge whether the first point has indeed happened.
To ensure that the process of the trading plan is implemented correctly, Forex traders can use check list to ensure all necessary steps have been taken to complete the process successfully. Here are some ideas of a check list:
1) Review SMART goals regularly (daily / weekly)
2) Review action plans and trading plan regularly (daily / weekly)
3) Review evaluations regularly (daily / weekly)
4) Judge mental and physical state prior to trading
- Rested? Well nourished? Drink sufficient water?
- Exercise? Daily movement?
- Any distractions during trading?
- Calm state? Emotionally balanced?
- Energy level?
- Successful thoughts? Positive thinking?
- Constructive thinking? Solution oriented?
5) Check news for announcements during the day and week
6) Be aware of rules and daily limits
7) Risk management review
8) Prepare charts, tools, indicators and pre-scan market
9) Identifying potential setups within trading document
10) Plan the trade
11) Monitor setups and setup pending orders if need be
12) Execute trading plan and implement trade management
13) Close trades and ensure all trade management is correct (i.e. pending orders deleted)
14) Update trading date statistics in trading journal
15) Take screenshots of trades and write down emotions and decisions
16) Fill in trading evaluation form
17) Relax and focus on non-trading material
18) Forex education: learn something new about trading
19) Relax, sleep well, prepare for next trading day
That wraps it up for today. Thanks for sharing this article and wish you Good Trading!
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Winner’s Edge Trading, as seen on: