How to be a Professional Trader (Part 2) Trade Plan Development

[ForexGuy]

Trade plan development

How many times have you heard it? You need a trading plan. You need a blueprint, a road map that can guide you and your trading. But what does a trading plan look like? What should you consider when writing one out? As part of my consulting business I talk with a lot of traders who are struggling. One of the very first things we cover is their current trading plan. A lot can be derived by listening to someone explain their method for entering and exiting the market. I would say 95% (and that’s being generous) of the traders I talk to either have no trading plan whatsoever, or their plan is so incoherent and subjective as to defeat the very purpose of writing it in the first place.

Most new traders have absolutely no idea how to write a trading plan. They have no concept of how it should be laid out, so they spend their time looking for a “secret system” or “magic EA trading program” that will give them trading signals. Nowhere is this more prevalent than in the Foreign Exchange market.

I have a Facebook page and I accept anyone who wants to be my friend. Since I am in the FX business anyone searching for FOREX is going to find me. That being said, I get A LOT of people trying to sell me something. My page is basically one big advertising board for every internet scammer selling $99 trading systems or $49 subscriptions to signal services. They do this for one reason and one reason only………it’s very, very, profitable……….for them.

We talked last week about the 90% of traders who lose money. Well with those kinds of numbers it creates a great deal of room for people to peddle fear and greed to the masses. Keep in mind the FX market is not the stock market, or the futures market. It is completely unregulated. People can peddle ANYTHING! And they do.

We, as trading professionals, want to step out of that world. We want nothing to do with the allure of million dollar promise or riches while we sleep. We want to attack our trading the same way a professional does. With a trading plan.

So what do you need to get started? Well the very first thing you will need is a concept for your trading parameters. Ask yourself some simple questions. Do I want to day trade or swing trade? How much time do I have to devote to the market? (Keep in mind if you have a full time job, day trading may not be the right choice for you. You may want to swing trade until you become a professional.) What markets do I want to trade? I like starting with time frames because it gives you something to work with. If you know you can only devote 2 hours a day to your trading, then you will want to use a trading system that does not require you to look at a chart more than once a day. This seems rather self explanatory but again you would be surprised how many traders I talk to who are trying to be day traders and cannot devote the time necessary to achieve their goals.

Once you know what type of trader you want to be, the next thing you will need is a system that fits your parameters to test. As a trading professional you would never dream of trading any system until you had fully tested it and found it to be profitable. There are hundreds of free systems out there. Ash has one on this forum. If you don’t like his, you can go to http://www.babypips.com and find all the free trading systems you could imagine. Pick one you thing sounds reasonable. There is no way to tell if it will work but you have to start somewhere. Bottom line, you cannot test a system until you have clearly defined the rules for entering and exiting the market. That is where your trading plan comes in. I want you to take that system and write it out. Be very specific about the rules. Words like “sometimes” or “I’d also like to see” should be nowhere on the page. Take any and all subjectivity out of your decision making. A good rule of thumb is this, if you gave your trading plan to 100 traders, would all 100 agree on when to enter and exit a trade? If the answer is “no” you have some work to do.

There is no doubt while going through this process you will find holes in your system. That’s ok, just fill them. Not sure how? Make an educated guess. Not sure if you should enter before the close of the candle or after? Pick one. (You will have the opportunity to test multiple theories about your system when we get to back testing, but for right now it’s not important.) What’s important is your ability to clearly state your rules for entering and exiting the market.

So now you have an idea of your trading parameters, a system you have clearly defined, what’s left? What about expectations and beliefs? I like traders to write down their expectations and beliefs, both about the markets and about themselves. Here is a list of ideas:

• I believe trading is a skill that can be learned.
• I am responsible for my trading decisions
• I am focused and disciplined.
• I trade only my system. I will not allow others to dictate my decisions.
• The market is always right. I am not smarter than the market.
• I choose to live my life in the constant, consistent pursuit of excellence.

Now these are only ideas and you can have as many as you want. My personal trading plan has twenty-two and is constantly evolving.

So to Recap:

You now have specific parameters for when and what you will trade, a trading system that you believe has a good probability for success, you have clearly written down your rules for your system, and you have a list of expectations and beliefs about yourself and the markets that will reinforce a positive belief system.

The last thing you need to do is print out a copy of your trading plan and tape it to your desk. (Don’t glue it. I got a little over zealous when I was starting out and ran into a little hiccup when I went to replace the old plan with a more clearly defined one. Awe the voice of experience. ) Too many traders stuff their trading system and rules for trading into a desk drawer and quickly forget about them. By taping them to your desk you are forced to face them every day. I HIGHLY recommend you review your plan at least once a day. I still read my trading plan every morning before I start the trading day. It puts me in a positive state of mind and reinforces my rules for entering and exiting the market.

It’s time to hit the send button. I hope this has been helpful. Feel free to send me a note if you have questions. I’m here to help. Next week we are going to cover the importance of back testing. This is by far the most overlooked and misunderstood area for new traders. It is something every professional trader does and if you have not done it I dare say your odds of success are almost zero.

Until next week, Good Luck, and Good Trading,

Jason Stapleton (ForexGuy)

4xTradersLive.com

[neo1599]

Hi

Thats a great article. Follows KISS which is the most difficult thing in the world.

Joined the site just so I could comment.

Regards

[pedro13]

I always had this question, I guess this might be a great place to ask:

If I have a 100% detailed trading plan, that's pretty easy to put into an automated trader. So how come all these automated systems are failing?

[ForexGuy]

Originally Posted by pedro13

I always had this question, I guess this might be a great place to ask:

If I have a 100% detailed trading plan, that's pretty easy to put into an automated trader. So how come all these automated systems are failing?

That is a fair question. The short answer is the majority of automated systems that you would consider buying are junk, built by people who do not trade and have no idea how to produce something profitable. They just want your money.

There are a great deal of automated systems that produce huge profits for institutions around the globe. Those institutions and funds pay millions to purchase and develop those systems. They are traded as part of a portfolio in order to vary the risk.

If you have been watching the news lately you will have seen all the buzz about "flash trading" and "high-frequency trading". These are computers running programs. They are very profitable. That is why firms use them.

Question what you think you know. Just because every $99 system you buy falls short of it's million dollar promises doesn't mean a good automated system cannot be constructed. Or that you cannot construct a plan using the same thought process.

[pedro13]

Wow, thanks Forexguy, you confirmed what I've thought that these programs exist. The question is then how is it going to reform the landscape of trading, because it will for sure. Quite offtopic though, sorry.

[iglyx]

Most of the profitable autotrading systems are constantly reviewed and supported systems based on heavy econometrics (constant search for relevant statistical signals and so on; it is almost scientific work and many IB's do it) and in the same time many of successful no-automate trading systems (that is, system being used by fx traders for trading for a living, etc) include components such as PA analysis that hardly can be automatized.

[jimmy111]

If new person wants to become a successful trader and don't know how to plan for trading then they should try to get idea from previous made plans and also follow other successful traders plans.

[Toney0198]

The online trading forex tutorial helps in presenting a foundation to investors or traders who are new or do not have much experience with the foreign currency markets. These tutorials cover the basics of exchange rates, the market’s history and the key concepts you need to understand in order to be able to participate in this market. Most such tutorials also venture into how to start trading foreign currencies and the different types of strategies that can be employed.