So you think you’ve got a good Forex trading plan.
You’ve chosen your indicators. Back-tested your strategy over several years and like a good lad or lady, traded it on your demo account for months.
Now it’s time to execute – ruthlessly.
But have you set yourself up for failure or success?
Everyone knows that with real money on the line things are different. They can get hairy.
To give yourself a fighting chance in the trenches, you will want a muscular and robust trading plan that includes the following ingredients.
Whatever you do, don’t ignore them. It never pays to put your head in the sand when it’s your money you’re talking about.
1. Magnetic goals
A good Forex trading plan starts with goal setting.
And “I want to make money” is not a good goal, so I’ll stop you right there.
Magnetic goals come in two parts:
- A specific number that is meaningful to you
- Your motivation for your trading – on a deep personal level.
Have your ever calculated your financial freedom number?
It’s pretty simple actually. You total your monthly expenses and that is your financial freedom number. Once you have more passive or trading income than your expenses, you are technically financially free.
This is an example of a specific meaningful number.
When you drill deep into your motivations, you unleash one of your most powerful resources. Relating your trading success to your deepest desires for freedom, happiness, love and family gives your trading a purpose that is both empowering and inspiring.
2. An insightful model of the market
Your model of the market delivers you your trading edge.
As a trader you should have written down in your Forex trading plan answers to at least the following questions:
- How does the Forex market work?
- Where can you see opportunities?
- How does news impact the Forex market?
- What type of trading strategies do you think will work?
- What timeframe suits you?
There are dozens more questions to answer in developing an insightful model of the market, but let’s keep it simple to start with.
3. Carefully crafted system objectives
This is where the fun begins.
(You were having fun already though right )
For each system (or strategy) within your Forex trading plan, you want to have detailed objectives that relate back to your magnetic goals.
Each strategy should have:
- A targeted return (i.e. 10% a month)
- An acceptable drawdown (i.e. 5% a month).
As you craft your goals, determine a willingness to risk the drawdown you have specified (i.e. I want only a 10% chance of the drawdown occurring). It’s impossible to eliminate the chance of a drawdown altogether, so it’s necessary to know how prepared you are to go for your goals.
4. A position-sizing model that achieves your objectives
There is magic in position-sizing.
It is where you gain most of your ability to outperform and out-trade the interbank traders that have access to a whole lot more information than you do.
When trading Forex, you are free to design a position-sizing model that achieves your objectives.
For example, assume you have a target of making 10% for the month, and you know that you are likely to have 20 trades that produce 10 winners and 10 losers, with the winners being on average twice as big as the losers. You can now work out precisely how much you should place on each trade so that you can make your target if your results fall according to your expectations.
By having a precise position-sizing model, you can adjust your position size depending on how close you are to your monthly goal. Importantly, by linking your position sizing to your objectives, you can risk more of the market’s money (your profits) and less of your initial trading capital, to avoid drawdowns and increase the chance of hitting your goal.
5. Awareness of the market type
A simple moving average crossover works wonders in some market types.
In others, it will chop your trading account to bits.
The simple solution: define the market type first and then use a strategy that fits that type.
Most traders fail to take this step and instead end up with a Forex trading plan that phases in and out of effectiveness.
6. Mental preparation like an elite athlete
Elite athletes don’t just physically prepare for an event, they mentally rehearse and visualize every element of their performance.
Traders who want to trade at a higher level have a routine in place that gets them in the zone when they trade.
When in the zone, they are mistake-free and capable of flawlessly executing opportunities that other traders don’t see. They trade the market that is in front of them.
7. A damn good set-up
Trading should not be random.
A set-up is a specific set of circumstances that directs you to a trading opportunity.
A set-up could be an upcoming news event that historically produces a move you like, a bounce of a key support and resistance level, or even a change in market type.
Your set-up should significantly tip the odds in your favour and give you an edge over other market participants.
8. Stalk an entry like a hunter
“The price pattern reminds you that every movement of importance is but a repetition of similar price movements” – Jesse Livermore
Amateurs mistake set-ups for entry signals or enter on entry signals without waiting for a set-up.
Pros are different. They wait patiently for a set-up and then stalk an entry, often on a lower timeframe, to improve the risk/reward on the trade.
9. An ironclad initial stop
A good entry takes into consideration an unbreakable exit, in case the trade goes wrong.
Ideally the exit is in a place that is difficult for the market to get to, not because it far away, but because the price action or flow of orders means there is less chance of it being hit.
10. A specific profit objective
A top trader has clarity around what they want to achieve from a position before they enter. A profit objective is a target that may or may not be placed physically in the market.
By having an objective in mind for the trade, a top trader can make decisions about how to manage the position – as only occasionally does a trade go straight to the objective without a hiccup along the way.
11. Interbank trade management with complex exits
In the interbank market, often a bank trader is given a position to work with, but has little or no choice about its direction. This means they need to become expert managers of their position.
And do you think they have only one way to get out?
You would not survive long in the interbank market if all you did was stick on a limit order and hope.
A skilled trader has a variety of exits that both protect profits, help achieve outsized gains, and take into consideration opportunities and risks that the market presents after the trade has been entered.
12. A scientific approach to improvement
You don’t master the markets overnight.
Sometimes it takes years of practise (that’s why you need magnetic goals – to remain motivated). But if you can take a scientific approach to improvement by recording and analysing the results of your Forex trading plan, you can shorten this timespan considerably.
Taking a scientific approach achieves four key things:
o It allows you to make methodical changes that improve your trading step by step;
o It helps you to practise effectively (if you practice poorly it does not count);
o It lets you know when to switch to a different trading system if the market changes;
o It keeps you safe from system death.
13. The master trader mindset
Top traders know that there is no holy grail for the markets – except themselves. That is why they dedicate a large chunk of their time to self-work and to developing an unassailable trading psychology.
The master trader mindset includes the right mix of the following traits:
- Optimism about the future;
- Ironclad discipline;
- Confidence in their trading plan;
- Humility; and
For the very elite, the master trader mindset can include a connection with their inner trading, or guiding power.
Now over to you…
You need to treat your trading like a business.
The carrot is there if you work hard. With Forex trading, you can make money online from anywhere in the world.
So it’s time to be smart about it.
Model what the experts do and include these 13 essential ingredients in your Forex trading plan. Start with one at a time. Pick the ingredient that sticks out the most to you, or better yet start from the top of the list and work your way down.
You trading will be much better for it.