Building a trading plan is the culmination of all the courses you have followed. Unambiguous, you will understand this forex courses that follow a trading plan simply without thinking to meet a number of pre-established rules in the plan.
What is a trading plan?
Okay but so concretely what this famous “trading plan”?It is a succession of rules used to pack all your actions before your chart. The trading plan leaves very little or very rarely stray into the spirit of the analysis. It is designed for purely hard and systematize your positions.But why not leave room for reflection on the graphics configurations?
You must know, poor self-control is more dangerous than the market itself. Therefore, you will not be aware that the majority of traders are ruined, do it on head shots. The human being, subject to psychological biases issued by the trading may have to make quick decisions empty of meaning or logic.
What is to build a trading plan?
The combat trading plan at any point this problem thanks to its strict rules, it avoids the trader to commit mischief. Moreover, applied over a long period, it will accustom the trader to comply with the rules and allow him to step back on the deviations noted.
We will now learn to design their own trading plan and above all how to test it (and yes, a trading plan is not a miracle, we must know whether it works)First, start with the design. It should follow a few steps to the creation of the list of rules:
What timeframe do you use to read the graph?
Fundamental question that will guide the rest of the rules, indeed here one wonders if instead applies a swing trading strategy, scalping or day trading yet. In a trading plan for beginner, we prefer take one single timeframe. This in order to avoid deviations from the rules caused by an expanded scope too.
What tools to define the trend?
The base is knowing which direction the market is heading, up, down or in range. For this, there are many tools, including trend-following indicators such as moving averages or the satellite.
For example: By choosing the moving average, several criteria are possible (which are subjective to each). The crossing of two averages, the slope of an average or even the relative position of the price compared to an average are all criteria that allow you to judge the trend
What ways to confirm the trend?
Here he will have to deploy all his imagination to find a way that will allow us to avoid false trends.
For example: If you choose the crossover moving average to define the trend, it may be interesting to watch how behaves oscillators. If average just crossed upwards but the RSI is below 50 then we can consider that the uptrend is still fairly strong.
How to choose your entry point?
We must find an optimal entry point to maximize gains and minimize losses. Here plethora of resources available to you. For example, you can enter as the breaking of a trend line, the current rebound on a moving average. The list of possibilities is limited only by the imagination.
How to choose exit point?
Again many conceivable possibilities. The basic idea is to let it run its gains and quickly cut its losses, while remaining logical (not to abuse this rule).
- You can cut your wins and losses at fixed levels.
- You can cut your gains on a fixed threshold but to drag the stop.
- You can cut your positions on technical information (eg if you cut RSI <30)
- You can partially cut your positions.
This may be the most important, a poor choice of risk can blow account …
The mix between limited exposure and viable performance is not easy to determine. It is especially adapted its risk to its trading frequency is therefore linked to the timeframe selected. If trader twenty times a day, it is clear that the estimated risk should be low for the limited possibility to see emerge a drawdown greater than 20%.
Test your trading plan
It is here that you will know if your system is effective or not. It should also pay attention to some details determinants during the test. Best if your plan is very mechanical, is to automate the strategy by creating an Expert Advisor and so you can test within minutes your strategy over several years and without errors. However if this is not possible, you have to backtest its discretion, it is long, tedious and you can easily go wrong. The discretionary backtest is to look at a historical chart to visually and test its strategy by working.
As if it were live. In short a lot of disadvantages, firstly it is very long and boring, then you forget to positions at places because no one sees them, and finally wanting to develop its strategy it is necessary to cheat on her test. In conclusion if you can program, automate!That’s it for theory, now I’ll offer you a simple trading plan and unpretentious as application example.
Example of building a Forex trading plan
- Timeframe: daily
- Identification of the trend: Orientation of MMS 100
- Confirmation relative position RSI (14) compared to 0 (over 0 confirms a rise and vice versa)
- Input Signal: Buy when the satellite passes in the courses and vice versa for sales
- Output signal: the parabolic inversion
Here we shall only some examples to illustrate the use of the trading plan, so we do not judge interesting to mention the risk.
Here is the first example, any edge we see a 100 MMS oriented upwards, in addition the RSI is above 50, so we will take that long positions. Besides the parabolic passes under the current, so we have a buy signal, we come into position. Then prices move clearly on the rise and we cut our positions since the parabolic changes.
Here, see a bearish configuration. We begin by looking at the direction of our moving average (down), then we see a less than 50 RSI confirms our hypothesis of a downtrend.Then appears our bearish signal shown by a higher than during parabolic. Our trade concludes with a nice fenced winning position at the next change of the parabolic.
Develop a strict trading plan is essential for success in Forex
Today we realize just the culmination of all the technical knowledge covered in previous chapters, we learned how organizing our knowledge simply develop a comprehensive and effective trading plan. The use and design of a trading plan will be useful to all, especially traders who are experiencing psychological and cognitive difficulties in this area. The idea of a trading plan is to think twice before for failing to do so for;)