Lesson 2: Why Do You Need a Trading Plan?

No traders worthy of the title rely on luck. After all, they’re no gambler traders.  Also, profitable traders separate themselves from their peer’s trading system. They know that to each their own when it comes to the financial market.  

But how do you ensure that you’re not relying on luck and you’re not blindly following other traders’ system? Well, you need to have a personalized trading plan. 

Lesson Highlights

• Having a trading plan is essential to battle the risk of emotional trading.
• A trading plan and trading system are both important in developing a skilled trader. A trading system is a predetermined standard for entering and exiting a trade, while a trading plan includes all the essential aspects of trading, like strategies, risk management, and goals.

Market Discipline and Trading Plan 

When you’re in the forex market, tons of things will cloud your trading judgement.  

This includes your emotion and the heat of the battle. The moment these take over your trading, you’re likely to make a bad decision and potentially run at investment losses.  

But how do you battle that?  

Like how your momma told you, discipline is your way to success. Yes, as cliche as it sounds; you must discipline yourself first before you taste success in the market. The financial market is dynamic, it changes every time and the best way to ride it is to stay goal-oriented, keep emotions in check, and make informed decisions.  

To do that, you need to establish your own trading plan, personalize it, and strictly adhere to it.  

A trading plan is a personalized and comprehensive tool that helps with your decision-making. It tells you extreme trading parameters such as; 

1. What to trade 
2. When to trade 
3. How much to trade 

By establishing one, you’ll have a logical reference when defining an ideal trade and making a market decision.  

Trading Plan vs. Trading System 

Your trading plan and trading system are both important toolkits that drive your discipline in the financial market. 

A trading plan includes all the steps you take when you’re in the market. Essentially, it’s your roadmap that details how you should perform your trading activities. When you’re plotting your trading plan, you need to define your; 

• Trading Goals and Objectives 
• Trading Style 
• Risk Appetite 

Meanwhile, your trading system is part of your trading plan. Essentially, your systems describe how you enter and exit positions and how you manage the risks of your respective positions.  

But remember that the financial market changes almost every minute. So, you should never limit yourself to only one trading system. One system may work on a specific trade, but it’s unwise to assume that it would fit all trades. 

How to Personalize a Trading Plan 

Your friend’s trading behavior is totally different from yours. While you both may have the same system and strategies, your risk attitude, available capital, and trading goals may differ.  

Here is the list of questions you shall ask yourself to ensure that your plan fits every aspect of your trading goals and needs.  

1. What is my trading motivation? 
2. How much time can I commit to trading? 
3. What are my trading goals? 
4. How much risk can I take? 
5. How can I handle risk? 
6. What is my allotted trading capital? 
7. What are my rules in risk management? 
8. What are my strategies to trading? 
9. What data do I need for journaling my trades? 

Once you have answers to all these questions, you can now make an informed and sound trading plan. Also, don’t forget to refine your trading plan regularly. As you grow in the financial market, your trading plan must follow suit. 

Remember, learn to be your own trader and see how opportunities come your way. 

Common Strategies for Your Trading Plan 

1. Market Analysis 

Conduct thorough market analysis using technical, fundamental, or sentiment analysis to identify potential trading opportunities. 

Utilize various tools and indicators to analyze market trends, patterns, and key levels of support and resistance. 

2. Trade Execution (Entry and Exit) 

Define clear entry and exit criteria based on your trading strategy and market analysis. 

Implement disciplined trade execution by adhering to your predetermined entry and exit points. Consider using limit orders or stop orders to automate trade execution and manage risk effectively. 

3. 1% Capital Rule 

Implement the 1% capital rule, which suggests risking no more than 1% of your trading capital on any single trade. 

This rule helps to limit potential losses and preserve capital over the long term, especially during periods of volatility. 

4. Position Sizing 

Determine the appropriate position size for each trade based on your risk tolerance, trading capital, and the distance to your stop loss. 

Adjust position sizes accordingly to ensure that each trade aligns with your overall risk management strategy. 

5. Stop Loss and Take Profit 

Set stop-loss orders to define the maximum acceptable loss for each trade, based on your risk-reward ratio and market conditions. 

Establish take-profit levels to secure profits and exit trades at predefined price targets. Also, regularly review and adjust stop-loss and take-profit levels as the market evolves to optimize risk management and maximize profitability.

Throughout this lesson, you’ve learned what a trading plan is and the common strategies to use. For the next lesson, you’ll better understand why having a risk management technique is important when trading forex.