Take It To The Next Level!
Do you want to join the 5% of the traders who actually make a living from trading? If yes, here is the step by step guide to writing a trading plan like a pro.
Most traders think defining the rules for entering and existing the trades is good enough. They couldn't be more wrong. Any seasoned trader will tell you that rules that define risk and money management is crucial to be successful as a trader.
Once you have defined the basic entry and exit rules of your strategy, use these steps to take it to the next level.
Step 1: Rules for Position Sizing
Here you will describe the process of determining number of lots for each trade. You can chose between fixed risk or certain percentage of equity per trade.
Example:
- Option 1 : Trade 1 lot every time regardless of equity or pair
- Option 2 : Risk 3% per trade based on equity size, stop loss and pip value
The second option is more tricky to calculate on the fly, you could either make a spreadsheet to make these calculations easier or else use any online tools. Google "Position Size Calculator".
Step 2: Rules for limiting losses, per trade, per day, per week, etc
In this step you will define limits on your losses. Someone wise once said "key to success is to focus on losses and not how much profit you can make". It is counter intuitive, how come to focus on losses can be any good?
Losses will burn your account and not profits, that's the bottom line. For this reason alone, one should focus on limiting losses. Profits will take care of themselves.
Example:
- Move Stop Loss to Breakeven after a certain number of pips / $ profit
- Not more than certain $ / % loss per trade
- Not more than 3 losses per day
- Not more than 3 losses per day
Step 3: Rules for adding to existing positions
Never add to a trade already in loss hoping when it turns back it will make even more money. That's exactly what I didn't do with my very first trading account. Oh well ! Very expensive lesson learned.
Let's say you are in profitable long position and you notice market pulling back to take profits. If your entry criteria says to take long again then go ahead.
Example:
- Enter a new trade if the same setup occurs on a different time-frame
- Not more than 2 open trades in the same direction
Step 4: Rules to stop trading or limit your size/risk
Here you will define criteria for when to call it a day, this will contain scenario when you are in profit and also when you are in loss. Should you continue trading after booking in certain profit for the day/week/month? Ask the same question in case of losses.
Psychologically one tend to take more risk when he/she had a good run, by stopping to trade further reduces the chance of giving back the profits. Alternatively, instead of stop trading altogether you can also lower risk per trade.
Example:
- Stop trading after making 3% in one day, 10% in a week, 30% in a month
- Stop trading after losing 3% in one day, 5% in a week, 10% in a month
- Cut risk in half per trade after meeting above criteria
Step 5: Rules for increasing your size/risk, per trade, per day, etc
If you chose risk based on a certain percentage of equity then lot size per trade will automatically increase as the equity grows. You may or may not want to increase the % risk, if so outline the criteria in this step.
On the other hand, if you trade with fixed lots per trade then there outline when you will increase the number of lots.
Example:
- Increase risk from 1% to 2% after 3 months of profitable live trading
Step 6: Rules for preparing for the trading day/week
To become successful at trading you need to treat it like a business. You should define specific activities throughout the day and on weekly/monthly basis.
Outline how your typical day will look like and when and how often you will perform analysis and review etc.
Example:
- Perform chart analysis before 8 AM
- Review trades from last week every Monday
Step 7: Rules for diversification among positions
In the last step you will lay out rules for overall exposure per currency. There will be times when you have a more than one potential trades on a base currency pair.
Say you are looking to go long on EURUSD, GBPUSD and AUDUSD. All three trades have USD in common and if all these trades are opened then basically you are tripling the risk on US Dollar. Any news release or economic event coming out from US will impact all three positions.
Hence it is important to diversify trades across various currency pairs and decrease overall exposure.
Example:
- Not more than 2 trades on same base currency pair in same direction
- Select the 2 best setups if more than 2 setups occur on the same time-frame
Summary
So there you are. Now you know how to write a trading plan like a professional trader. Spend 30 mins on creating your own and trust me this is best half an hour you will ever spend.
Do you want to join the 5% of the traders who actually make a living from trading? If yes, here is the step by step guide to writing a trading plan like a pro.
Most traders think defining the rules for entering and existing the trades is good enough. They couldn't be more wrong. Any seasoned trader will tell you that rules that define risk and money management is crucial to be successful as a trader.
Once you have defined the basic entry and exit rules of your strategy, use these steps to take it to the next level.
Step 1: Rules for Position Sizing
Here you will describe the process of determining number of lots for each trade. You can chose between fixed risk or certain percentage of equity per trade.
Example:
- Option 1 : Trade 1 lot every time regardless of equity or pair
- Option 2 : Risk 3% per trade based on equity size, stop loss and pip value
The second option is more tricky to calculate on the fly, you could either make a spreadsheet to make these calculations easier or else use any online tools. Google "Position Size Calculator".
Step 2: Rules for limiting losses, per trade, per day, per week, etc
In this step you will define limits on your losses. Someone wise once said "key to success is to focus on losses and not how much profit you can make". It is counter intuitive, how come to focus on losses can be any good?
Losses will burn your account and not profits, that's the bottom line. For this reason alone, one should focus on limiting losses. Profits will take care of themselves.
Example:
- Move Stop Loss to Breakeven after a certain number of pips / $ profit
- Not more than certain $ / % loss per trade
- Not more than 3 losses per day
- Not more than 3 losses per day
Step 3: Rules for adding to existing positions
Never add to a trade already in loss hoping when it turns back it will make even more money. That's exactly what I didn't do with my very first trading account. Oh well ! Very expensive lesson learned.
Let's say you are in profitable long position and you notice market pulling back to take profits. If your entry criteria says to take long again then go ahead.
Example:
- Enter a new trade if the same setup occurs on a different time-frame
- Not more than 2 open trades in the same direction
Step 4: Rules to stop trading or limit your size/risk
Here you will define criteria for when to call it a day, this will contain scenario when you are in profit and also when you are in loss. Should you continue trading after booking in certain profit for the day/week/month? Ask the same question in case of losses.
Psychologically one tend to take more risk when he/she had a good run, by stopping to trade further reduces the chance of giving back the profits. Alternatively, instead of stop trading altogether you can also lower risk per trade.
Example:
- Stop trading after making 3% in one day, 10% in a week, 30% in a month
- Stop trading after losing 3% in one day, 5% in a week, 10% in a month
- Cut risk in half per trade after meeting above criteria
Step 5: Rules for increasing your size/risk, per trade, per day, etc
If you chose risk based on a certain percentage of equity then lot size per trade will automatically increase as the equity grows. You may or may not want to increase the % risk, if so outline the criteria in this step.
On the other hand, if you trade with fixed lots per trade then there outline when you will increase the number of lots.
Example:
- Increase risk from 1% to 2% after 3 months of profitable live trading
Step 6: Rules for preparing for the trading day/week
To become successful at trading you need to treat it like a business. You should define specific activities throughout the day and on weekly/monthly basis.
Outline how your typical day will look like and when and how often you will perform analysis and review etc.
Example:
- Perform chart analysis before 8 AM
- Review trades from last week every Monday
Step 7: Rules for diversification among positions
In the last step you will lay out rules for overall exposure per currency. There will be times when you have a more than one potential trades on a base currency pair.
Say you are looking to go long on EURUSD, GBPUSD and AUDUSD. All three trades have USD in common and if all these trades are opened then basically you are tripling the risk on US Dollar. Any news release or economic event coming out from US will impact all three positions.
Hence it is important to diversify trades across various currency pairs and decrease overall exposure.
Example:
- Not more than 2 trades on same base currency pair in same direction
- Select the 2 best setups if more than 2 setups occur on the same time-frame
Summary
So there you are. Now you know how to write a trading plan like a professional trader. Spend 30 mins on creating your own and trust me this is best half an hour you will ever spend.
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