TWO: A Trading Plan, Having and Using
Trading any of the financial markets is a one on one activity. If someone is going to do it for you it is you. You will need to follow a trading plan and guess who is going to have to write that trading plan. You can get examples of how to construct a trading plan but you have to put in your personal information.
This is something you will actually have to write out. Long hand or computer generated but you will need a hard copy to refer to, it needs to be in front of you. You will need to have your trading rules to refer to so you stay on track. You just need to get the rules down then follow them.
You need at least three parts: the Setup, Entry and Exit. You can find an example of a trading plan in this blog under favorites posts.
A trading plan should be thought out and cover every eventuality. When to trade, how much to trade, when to enter, when to exit, all the details of how your trading will take place. By doing this part of your trading career puts you way ahead of where you will be if you by pass it. You will be wandering around trying to figure out why things happen or what just happened.
ONE: What Trading Really Is
When we trade properly we need to know that we are using the law of probabilities.
When you go to any gambling place you are playing with probabilities. The thing you already know is that the probabilities are in the favor of the house. When you use a trading system you are putting the advantage in your favor.
For example you have moving averages, oscillator signals, conformations, trends, time frames to put the advantage in your favor. If one indicator gives you a signal then you wait for the confirmation of the other indicator to give you another signal to enter the market. A trading system helps you identify high probability trades.
Some trading systems are better than others. Don’t get caught up in trying to find the perfect trading system. You know the “Holy Grail” the system that is right all the time and is never wrong. Find a trading system that is simple to use, one that you like and feel comfortable with and then stick to it and be consistent.
A trader that follows the rules of a trading system will most likely make money using it. A trader that does not follow the rules will probably lose money.
Inside The Trader’s Mind
Over the next couple of weeks we will give you some of our thinking about why we are all different in our trading success.
We have been asked what kind of results will we get with your trading system, what percentages of success will I get?
Let’s look at two traders. They have the same capital, open account with the same brokerage, were taught by using the same trading system, have the same entry and exit signals. Now give them some time to trade and check back. One trader is up by 25% and the other is down by 30%. It is interesting that with the same information two different traders get such different results.
We feel that each of us creates our own trading success by how we feel toward the market, the reason we trade, and how we feel about making money, along with many other reasons. The same reasons may be why it takes traders different length of time to learn the market, why some traders start to trade live sooner than others, and many more reasons why we are different when it comes to trading.
Prepare For Success
While on vacation over the 4th of July 2008 we visited Mt. Rushmore, South Dakota in the black hills. You know the place with the sculptures of the presidents of the USA. As we learned about what it took to make this monument I was amazed. It took years of work for many men.
They made small statues 1/16 the size of what they wanted to sculpt on the mountain. Then they took measurements of the small statues and then times it by 16 to get the measurements for the larger work. 90% of the sculpture was done with dynamite. Then they used other methods to get the finished work. The craftsmen became so good that they could come within a couple of inches of the finished surface by using the dynamite.
Mr. Borglum, the artist was 57 years old when he started the project. He lived for 17 years before he died and left his son to finish the project. He had worked on many projects and was taught by engineers how to do this type of blasting with dynamite to get the end result. They had to get rid of the surface granite to get to the granite that was hard enough to sculpt.
A Change Is As Good As A Rest
I have had a few days away from trading. The time has been spent with family and just traveling around the country. We are in Wisconsin right now actually and I thought I would check some email and glance at the charts for a little bit. I had a trade on and was taken out on my stop loss. Now that I have time to think I can see that I had the stop loss set a little close. If I had been 7 more pips away then I would not have been taken out and my original trade would have given me about 150-200 pips profit.
I get a lot of these trades so I am not concerned about one that got away. I will however learn from this and not play the market so close. As I review my mental state at the time I made the trade I can see that I needed a break from trading. When I give the market room to breathe I usually come out Ok.
The Excitement of a Flat Market
We have heard many complaints from traders about the market being flat, the market is dead etc. Is that the real problem or is it that traders do not know what to look for when the market is going sideways?
For new traders it is soon learned that sideways markets are great set ups for break out moves. The longer a price moves in a sideways direction the stronger the break out usually is when the move is made. I like to use the 30 minute chart to see the moves set up and break out. When the 30 minute chart starts to go flat that is the signal that a break out is soon to follow. Put an alert just a little above and below the tops and bottoms of the sideways movement then wait until the market moves outside the alerts that may be a good time to enter the market.
When the market is sideways get ready to trade.
Is It Okay To Take A Day Off From Trading?
Here are a few reasons when it is unwise to trade With Real Money
1. When the market is moving sideways and there is no real movement of any importance.
2. When you are ill.
3. When you are tired
4. When you are emotionally distracted with other issues.
5. When you are trying to trade with money you cannot afford to lose
6. When you have to make a certain amount of money each day or week
We all need a change once in a while. It seems that I make more money when I am fresh and rested. It is easier to get in the flow of the market and make good trades. A trader also needs to take care of their emotional, physical and mental health. For those that want to make real money they need to take trading seriously and take care of themselves.
These are some ideas that help us so we thought we would pass them on to you.
Trading in Larger Time Frames
There are three main trading styles.
They are:
Day traders 1-5-15 minute time frames
Swing traders 30 minute to 4 hour time frames
Position traders 1day and longer
(These are general rankings for the time frames of the trading styles)
Day traders go for smaller numbers of pips and large number of lots. They are in and out of the market many times a day.
Swing traders are in trades from a few minutes up to a few days. They may be in and out of the market a few times a day.
Position traders may be in a trade for weeks, months or years.
Day traders like a lot of movement and action in the market.
Swing traders like movement but a trend is better. The trend is based on 4 hour time frames maybe day time frames.
Positions traders may look for trends on days or months.
Random Thoughts-Helpful Tips
I had a few random thoughts about the market and thought that I would post them as tips below. I hope they can be beneficial and make sense!
1. Best way to manage risk.
- Always trade with a stop loss.
- Control the size of your trades-Know the Percent of your account to be traded. 5% max, no more than 2% on any one trade.
- How to figure the percent of your account to trade: total account size times by 5% divide by 50 = # of lots. For example, $3000 x 5% = 150 divided by *$50 of margin per mini lot traded gives you 3 max lots at a time traded, with 2 lots traded at any one time. It is better to use 1 lot to start with until you know which way the market is going for sure then add more lots as is appropriate. At first it would be better in one-lot increments or even fractions of lots. When your skill level increases then you may consider increasing the number of lots traded.
MINI ACCOUNTS
You can trade micro mini lots (pennies, and dimes)
|
Mini Lots |
Margin |
$ per pip on ‘USD’ pairs |
My Winning Check List
This check list helps to keep me on target I would suggest you refer to it on a regular basis. It has helped me throughout my years of becoming a more experienced Forex trader.
1. I objectively identify my advantages.
2. I determine the risk of each trade before I take it.
3. I accept the profit and loss on each trade; I am willing to close the trade when I am given signals.
4. I act on my advantage without hesitation.
5. I protect my profit as it becomes available.
6. I continually review my trade tracker sheet for success and failure patterns.
7. I never deviate from the rules of success.
« go back — keep looking »