When you’re a novice trader you’ll be continually reminded and encouraged by your mentors and fellow traders to create a trading-plan. There isn’t an accepted blueprint for a plan, although there are a set of generally regarded rules most traders would agree are essential to be embedded in the plan.
The trading-plan should be so highly
detailed and precise that it covers every aspect of your trading. The plan
should be your ‘go to’ journal which should continually be added to and
revised. It can be simple and factual, or it could contain a full diary of your
all your trading activity, right down to each trade you take and the emotions
you experienced during your early trading period. Before you consider trading
here’s a few suggestions as to what should be in your plan.
Set your goals
Set our the reasons for trading; why
are you trading? What do you hope to achieve, how quickly do you want to achieve
it? Set yourself a target to become proficient before setting a target to
become profitable. You have to familiarise yourself with many aspects of this
highly complex business before you can begin to target account growth.
Establish your risk tolerance for both
individual losses and total account drawdown
Risk tolerance can be a personal
issue, one trader’s acceptable risk can be another’s anathema. Some traders
will only be prepared to risk 0.1% account size per trade, others will be
entirely comfortable with 1 to 2% risk per trade. You can only decide what risk
you’re prepared to tolerate after you’ve engaged with the market. Many mentors
refer to the sweaty palm test; at what risk level do you experience no raise of
heart rate or anxiety when you place and monitor a trade?
Calculate your risk of being unable to
Whilst you may fund your first account
with a nominal amount, there will be a level of loss, due to leverage and
margin requirements when you can’t trade due to your broker’s and market
restrictions. You must also reference your initial account funding to your
level of savings. For example, are you risking 10% of your savings to attempt
to learn how to trade forex?
Record and analyse all the backtested
results of the strategies you’ve tested
You will experiment with many
individual technical indicators, you will also experiment with many clusters of
indicators. Some experiments will be more successful than others. Recording the
results will help you establish which style of trader you should be. You will
also, through a process of elimination, determine which strategies are more
applicable to the various trading styles you may prefer.
Create your trading watch-list and
begin to decide why you made these choices
You need to decide what securities you’ll
trade before you commit to live trading. You can adjust this watch-list at a
later date, you can add or subtract from it depending on how your strategy
works during live trading after a test period. You must establish if you prefer
to trade major-pairs only, or perhaps you may develop a signal strategy whereby
if the signals chime and align on any of the securities in your watch list you’ll
take the trade.
List the principle ingredients of your
profitable trading system
It’s essential that you break down
your overall strategy into all of its constituent parts; the securities you’ll
trade, the risk per trade, your entry and exit parameters, the loss per day
circuit breaker and the drawdown you’re prepared to tolerate before considering
changing your method and strategy etc.