By Taylor Wilman
Let’s recognize one important fact; if you’re considering FX as a business, part time or full time, it’s a serious occupation. Treat the industry with respect and you’ll increase your potential for success, treat it with disrespect and you’ll increase your chance of failure.
So ask yourself a question; “what kind of business doesn’t have a plan, an overall business plan, a plan that’s fluid and evolves over time, versus a plan being fixed and absolute?” Imagine for a moment that you’re a bank manager, or potential investor. Would you invest in, or lend money to a business (however small) that hadn’t put a business plan together? How seriously would you take that proposition without a plan covering: profit and loss, cash flow, funding requirements, etc? How seriously would you take the commitment of the individual asking for funding, if they hadn’t put in the basic effort required to create even the most basic of plans?
When you begin trading and you fund your first account, think of it in these terms; you’re effectively lending yourself money. This money may be part of your savings, built up over a significant period of time. It may be a personal loan from: friends, family, or a bank. But would (and should) you lend it (to yourself), if you haven’t taken the industry seriously, if you haven’t even gone through the minor inconvenience of creating a trading plan?
Many large corporations will constantly work on business plans, each department may have differing plans, under the overall umbrella of a “master-plan”, revising and honing the plans to perfection. Nothing is left to chance, risk is minimized. The question often asked is quite simple and repetitive; “What’s the strategy and how do we execute it?”
It therefore comes as some surprise that so many new fledgling and what we’d term “intermediate traders” still: fly solo, still operate by the seat of their pants, still trade through a random combination of instinct and impulse, without any basic trading plan to anchor their risk and trading methods to.
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So how should a plan be constructed, what should be in it and how do we put it to work?
It’s impossible, within the confines of a short article, to fully cover all the points and complex detail required in a trading plan, therefore we’ll simply concentrate on two of the salient, key points and encourage readers to do their own research. In short; we can’t construct a personalized plan for you, you’ll have to put in the spade-work yourself, but here’s some valuable hints and tips.
Risk and money management
The first aspect we should consider as a template in our trading plan is risk, which relates to our overall account size and the risk we assume per trade. Let’s use a ten thousand euro account as an example; what’s your risk per trade going to be? 1% per trade, €100? How many trades will you place per day, will it be fixed, or variable? What daily drawdown will you suffer before trading ends for the day, 2%, 3%, a maximum of €300? What overall level of account drawdown will you suffer, before you decide that your trading method is not working, so therefore it needs adjusting, or complete abandonment? Do you even have an emergency default position, which if breached you’ll give up live trading and return to demo? Perhaps a 25% account loss.
Linked with risk, wherever traders gauge their position on the development scale, they should never ignore the impact probability has on their trading, particularly if you’re a scalper, or day trader. Probability, linked with risk, is a critical success factor.
Method
Are you a long term position trader, swing trader, day trader, or scalper? Are you looking towards trading for a full time income, part time, or as a hobby? This crucial decision will determine your method and also overlap perfectly with the previous decisions you’ve taken in relation to the risk and money management aspect of your trading plan. Your margin requirement and potential overnight funding costs will be dramatically effected, depending on which ‘style’ of trading you choose.
Therefore, in the section of our trading plan titled “method”, before we even begin to establish our style, we should reference and rationalize our risk tolerance. And when outlining method, your risk per trade should be determined by stops (trailing or hard stops) and your profit levels determined by take profit limit orders. Again, these aspects should take preference when considering method, over and above whether you’ll stop and reverse trade direction using indicators such as the: PSAR, stochastics and the RSI.
So we’ve covered risk, money management and begun to explore the aspects of method required in a trading plan. Without a doubt these two issues form the bedrock of any trading plan. And having provided you with this initial guidance and suggested a template, it’s up to you (as a professional trader) to begin to construct your personalized plan.
Article by Taylor Wilman