The Importance Of A Trade Plan – Intelligent Forex Trading

November 27

07:49 2012

Most traders, regardless of their level of experience know the importance of having a trade plan. We have all heard the famous adage attributed to such well known people as Winston Churchill and Benjamin Franklin, “Failure to Plan is Planning to Fail”. Who really cares who said it first because the truth behind it is what’s most important. What it means in simple terms is if one goes about achieving a desired task without first having a clear and well defined plan they are all but destined to failure more often than not. This will cost them precious time, energy, and more often than not money too. Whether it is war or building a shed in the back yard, planning must be done if success is to be achieved. Without a doubt trading is no different.

Through this training article we are going to call to attention the important of a trade plan, as well as some key trading tips in regards to making your trade plan successful. There was a pole of 100 traders who were yet to be consistently profitable. Of those 100 traders, 88 did not have a clear and well defined trade plan. These results were in no way shape of form shocking to hear, and nor should they be! Without a doubt there is a clear link between not having a plan, and not achieving your end goal. How though does a trader begin laying out a plan that will lead them to consistent successful trading?

The Forex Trading Strategy

All good plans start with a proven trading strategy. Everybody who follows us here at DTFL knows that we are in the business of following the banks and their activity. If your trading
strategy revolves around tracking banking activity that makes things rather straight forward. How so? Understanding how the banks work gives you clear defined criteria or “trade setups” that you can follow. If however you use another system, strategy, or technique it starts with knowing the EXACT criteria that needs to be satisfied before placing a trade. If you do not have this written down clearly you shouldn’t wonder why consistent profits elude you. One of my first tips to struggling traders, and the first step in any trade plan is to clearly define exactly what is needed to take an entry.

Why is a plan so vitally important when putting your trading strategy to use? Trading live money is an emotional experience, especially when first learning to trade. If you just enter randomly when things “look good” this will lead to almost certain failure. Having a trade plan gives you a standard to go by as well as something to judge each trade against. As you keep track of each trade in your trade journal you will be able to see any mistakes that you repeat. I cannot stress the importance of this paragraph. Without doing having a “standard” or trade plan to judge each trade against you cannot improve your trading. Its a simple fact many neglect to their determent.

Making The Strategy Your Own

One of the main issues a new trader faces when starting is the idea that they should be able to reproduce the results of their mentor or teacher. Of course this is the end goal, but it is important to give this some further thought. The problem is in thinking that the student will eventually trade the exact same way the teacher does. This is a very big mistake just about every new trader makes because it will never happen. The reason is the difference in their personalities, personal schedule, discipline patience, and many other factors make it virtually impossible to do so. That fact that no two people think alike means that in order to be successful with a method you are being taught, you generally must in some way make it your own. Therefore you must form the trading strategy you learn to your own personality and then you will have a much greater chance for success!

The best analogy I can think of is the TV show American Idol. Just about every country in the world has a TV show that mimics it so everyone should be able to identify with the following analogy. Every winner of that series has one thing in common. Generally speaking they sing many famous songs, but they do so with their own personal touch. They can’t reproduce the original song because their vocal cords and thus tone are different from the original artist. In order to sing the song to the best of their ability, they have to “make it their own”. This means singing the song within the limits of their voice, in addition to changing it to better fit them personally. It’s no different with trading a method that is taught to you. Here is a real life example.

As most of our members know Sterling and I are rather strict on our entry criteria. The trade off to having strict entry criteria is missing trades from time to time. By comparison however we have quite a few members who take the more aggressive entries and do well. Generally Sterling and I would miss many of those “aggressive” trades, but that is something we know and are perfectly willing to accept. More aggressive entries may very well mean missing less market moves, but this however comes with a trade off. In general the more aggressive a trading style is the more losses you will take. Knowing this Sterling and I would rather have a higher win loss ratio and miss a few market moves. This is our personal trading plan and it suits us and our personalities. Every trader however must examine themselves personally, only then can you custom fit a trading strategy properly.

Adjusting Your Plan

Although I agree that one must have a plan to achieve their goals, I also believe that expecting everything to go exactly according to the plan is unrealistic at best. Before becoming a full time forex trader I owned a serviced based company. Many times I had a great plan to achieve the desired goal or task, only for that plan to be thwarted by some unpredictable human variable. To be honest I can’t remember one time that a plan went exactly as expected, and I’m sure many of you can relate to this. No doubt there were a few times where things did follow the plan to the letter, but these times were few and far between.

The same could be said of anyone who has plans to trade forex full-time or part-time. Expecting the market to follow your plan 100% of the time is unrealistic, and therefore we must be ready for deviations along the way, especially in the often unpredictable markets we are often faced with today. It seems like every other day a major tape bomb creates an unexpected market spike. Unlike scheduled economic data, unscheduled market tape bombs cannot be planned for, nor can they be predicted with consistent accuracy. This is but one example of how the ever volatile currency market can thwart your well drawn out trade plan.

As our members know, several months back I had to adjust my trade plan due to market conditions. Doing so was not easy as it went against my personality. The part of my trade plan that was in need of adjustment was the way in which I took profits. I am someone who really enjoys seeing the market run 70, 80, 90 pips or more when I am in the trade. In general if we have correctly identified what smart money is doing this is normally not much of a stretch during normal market conditions. With the much tighter ranges however I knew a tighter take profit would result in greater overall profit, and therefore I made the necessary changes. The market was telling me something and I had to make myself listen although it was not necessarily easy to do.

The point here is you have to find balance with your own personality and the changes that will be necessary along every traders career. In this example, market conditions warranted changes in my standard profit targets. One can never know all the changes that will occur over a trading career, and knowing ahead of time is in no way necessary to having a profitable trading career. The main point to take away is that you will have to adjust over time. Doing so does not mean that your original plan was wrong. Often the path to success is never perfectly straight nor without obstacles, and as such we must learn to adapt and change our plan as circumstances dictate.

Having A Trade Journal

Do you have a trade journal? While I recommend a trade journal for all traders, it can be especially beneficial for those who are struggling with achieving consistent profits. A trade journal is not just a log of your trades, rather it should include a detailed summary of not just the entry but the trade management as well as the exit. Did you stick to the plan? What were your emotions like during the life of the trade? At the end of each week as you go over your trades you will quickly identify negative patterns that need correction. A journal will also show your predominate feelings or emotions as you trade. This will help you create a trade plan that better suits you personally. Use your emotions to your advantage rather than letting them be a hindrance. A trader should never be excited, anxious, depressed, angry or drunk 🙂 Trading should be a calm and more often than not quite a boring time while waiting for the correct market conditions to take place.

In Conclusion

I hope this training article has shed some light on the importance of a clear, well defined trade plan. There is without a doubt a direct link between a trade plan and your chance of success. Statistics show that over 88% of traders go into the marketplace without a clear well defined plan of action. This is a staggering figure, and one that you would do well to take to heart. Do you have a clear well defined trade plan that you have actually written out rules for? Does that include rules for not only a trades entry, but also complete trade management? If you have not done so and you are still struggling to be consistently profitable I would strongly urge you to do so BEFORE placing your next trade. Though this article we also discussed how a journal of past trades can help you develop and progress as a trader. If you do not have a journal, this as well should be a priority!

What next? Well, if you intend to create a trade plan you must have a trading strategy as we discussed at the beginning of the article. If you have not yet mastered a trading strategy I would urge you to check out our Advanced Bank Trading Strategies Course and Live Forex Training Room. Once you understand exactly how the banks tend to move the market you will have a clear well defined trading strategy from which to develop your trade plan. As you begin to put that trade plan into practice you will then be able to create a journal, from which you can identify and correct mistakes. The road to successful forex trading is one that takes time, practice, hard work, and support. We are here to help if your ready to work!

Happy Trading

Chad

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