The 5 Needed Rules To A Trading Plan

In trading more so then in any other business, when you fail to plan, you plan on failing. In trading you must have a plan of action written out before you place the trade. The Forex market is way too fast to think you can make sound judgments on the fly. It is full of price reversals and head fakes, and if you have not prepared yourself for the obstacles ahead of you, you are not going to succeed.

You need to have studied your Currency Market and plotted out your support and resistance levels before you pull the trigger on a trade. More so then knowing your forecasted price points your Money Management system needs to be sound and in place. Trading Plans are 85% Money Management and 15% analysis. In this article we are going to focus on some of the Analysis.

I have a whole section in my E- Book on Money Management and it needs a lot of depth. It is the most important aspect to your trading.

Part of it is Position Size which I went over in previous articles. I will not belabor the points here, but I do suggest you reread them if need be. The trading plan has more to do with how you are able to trade the currency market, based on your risk capital.

However, no money management system can make profits for a trader that is hap hazard and makes bad trading decisions, conversely and excellent market timer with great trade selection will not be guaranteed profits without good money management. It is a double edged sword. That's part of the 85% of the trading plan. I will now go over some of the more important minor (most often overlooked) aspects.


Minor Rule Number 1


Before you enter your trades write down the price move you forecast that you can capture. Look for modest profits; don't always be looking or a home run. Get on base often and learn to use trailing stops, this way the market takes you out of the trade. When you are in a good position you will be able to ride the wave longer and capture more profits with less head games occurring. Always be mindful of your risk/reward ratio it should be a minimum of 1.7:1. Example you risk $1000. You should be looking for $1700 in profits.


Minor Rule Number 2


Establish profit objectives. It is a bit different then rule number one. In rule one you have your modest gain that you are looking to capture. In this rule we are going that step further where we are in a run away market that is in our favor and have perhaps broke a support or resistance level. You should have an overall profit objective based on a percentage gain to your equity that you would want to lock in.

Example could be a 12% gain of your account equity. You will move your Trailing Stop to that level and let the market take you out if a retracement occurs. This is a crucial point to keep in mind, I have seen trader's double accounts in one day, and lose all the gain and Base equity because of greed and fear, in another trading session. There can be nothing worse then having a great trade turn bad and not having an exit hatch to jettison out of. Believe me you want to keep those gains; it is really annoying when you let them slip away.


Minor Rule Number 3


Have a maximum amount of capital that you are willing to commit at one time. You have to limit your exposure so you do not begin to over trade. Don t open 5 different positions in different currencies at once. Go to were you believe the action is and plan your trades accordingly. If you feel you need excitement go do something that quenches that thirst. Don' t use your trading account to escape boredom.


Minor Rule Number 4


Have plan for increasing or decreasing your positions. If you want to add to a position do it at certain predetermined levels. Always add less then your base position. (Pyramid Profits with a larger base on first) Example would be if you have 100,000 euro on and you are going to add do 50,000 more, then another 50,000 at a different level. When you go to liquidate the position if you're long sell into the rally at predetermined levels (Stepping).

If you're short buy into the dips at predetermined levels as well.


Minor Rule Number 5


Do Not Force A Trade!

This is really not a minor rule; really there are no minor rules just ones that seem to have less glamour then others. I would like to go over something that I feel is a real important point. Realize how fortunate you are that you do not have to trade every day.

When I worked at the bank I was forced into trading every day and night at times due to customer orders, Interest Rate Swap tails that needed to be bought or sold, Money Market desk activities; that's the borrowing and lending of currencies taking interest rate positions. So my point is do not force a trade if it s not there for you. Enjoy the process of being a sniper, and entering on your terms.

This is an article written by Thomas Strigano, from Forex Confidante.