Developing a Trading Plan

Having a trading plan will define you as a trader.  It helps you set up and monitor your trades, it helps you with the entry and exit of your trades, introduces consistency and it will improve your ability to spot trading opportunities.  It will help you reach your goal and the reason why you are starting a trading career.  Developing a trading will give you a chance to think about what kind of trader you are, what type of trading that means you need to do, what time of day you are going to trade, and ensure that all these points put together will help you reach the goals you have of starting trading in the first place.

If you’re planning to become a professional trader, developing a trading plan should be the first step before getting your feet wet in the markets.

What Trader Are You?

The second component of your trading plan is what type of trader are you going to become?

  • The Scalper – the scalper often keeps trades open for a very short period of time.
  • The Day Trader – all of the positions of this trader are closed at the end of every day.  No positions are kept overnight, and they take each day as a different trading day.
  • The Swing Trader – this trader will keep trades open for days at a time – the medium term and take profit from general swings in the market.
  • The Position Trader – This is the trader who holds positions open the longest of all traders.  Once an investment is made, the position could be kept open for months or even years.

You can see that each of these trader types are different from the others, with a different set of goals, risk aversion, and time commitment.  While each of these traders is placing trades on the market, what makes them most different from each other is the length of time they leave their trades open.

Trader type and time trades are kept open

How does each trader trade?

The Scalper:  This is the trader who engages in scalping, which is high risk and high reward trading, and really for expert traders who have experience.  The day is full of very active trading and requires traders to constantly monitor the charts for a good time to exit the trade.  It is very high pace trading, with many small trades opening and closing all the time and very good for you if are trading the openings of markets.

This type of trading is probably not the best idea for traders who get stressed easily or traders who don’t have the time to dedicate to watching the charts – like those of us who have day jobs that require our attention.

The Day Trader:  This trading is slightly less risky than scalping, and for those who like to see their win/loss at the end of every day. Again, it is not for newcomers to Forex trading, and not for traders who hope to leave their trades unattended while at work.  This option is also good for traders who can not trade every day of the week but can still commit a full day to their trading.

The Swing Trader:  This is much better for the beginner trader as long as you don’t mind watching progress in your account over the period of a couple of days.  This is an opportunity for a trader to set up fewer but better trades, which really suits a trader who is learning the ropes.  If you are making longer trades, hoping to make a profit from swings in the market, make sure you have a well-funded account so you don’t get a margin call by your broker at a time when closing your trade could mean a loss on your account.

The Position Trader:  This trader is someone who has little time – just the time monitor the trades and do the initial research.  This is ideal for those who spend long hours commuting that can be used for research.  The downside is that you will have a lot of your account locked up in trades most of the time.

With this kind of trading, fundamentals are important and there are no technical aspects of trading as the goal of this trading is to follows major trends and not minor movements of the currency.  You will need to have patience as the market will go against you for short periods, and you will need to have large amounts of capital to withstand these temporary losses.  As with the Swing Trader, make sure you have enough margin in your account as a margin call could pull you out of the trade the wrong point.

When do you have time to trade?

Every trader will have preferred currency pairs to trade and will prefer to trade different markets.  The markets are open for set periods over the course of the five-day workweek, so it is important to match your trading type, and strategies with the markets.  The best period to trade for most South Africans is between 10 am and 4 pm.  This will give you the opportunity to trade the end of the Tokyo session, the start of the London session and you can prepare for the start of the New York session.  Traders succeed when markets are the most volatile, and this will be the most volatile part of the trading day.

TIme Forex Trading Markets are open in South Africa Time

Why Trade Forex? What Are Your Trading Goals?

The reasons why we want something are what builds desire causing us to become better and keeps us going crazy during challenging times. The more reasons you have for why you want to accomplish something, the more likely you’re to succeed.

Executing on your Trading Plan

Develop Positive Habits

It is important to develop positive habits that you’ll depend on each trading day. These are things that we need to do each day in order to put get our heads in the right frame of mind to be able to trade the best we can. Successful trading is all about repeating over and over again the same things that helped you make money yesterday, without our emotions get in the way of our progress.

Know The Trading Strategy That Works For You

You must have trading strategies.  This is your plan of when to enter and exit the trade. This part of your trading plan will define your rules of engagement for entering a trade, what patterns are you going to trade and at what time of the day you should execute your trades.  We have a lot of articles on strategy in our education section so I won’t go into more detail here.

Money & Risk Management

Money and risk management is the cornerstone of every successful trading plan.  Risk management has to do with your trade entry rules, exit rules, position size, the risk to reward ratio. Money management can be broken into three parts.

  • First, plan your risk exposure. This refers to how much we’re willing to risk on any one position.  This is a personal preference that has to do with your risk tolerance but it’s generally advised not to risk more than 1-2% of your trading capital on any given trade.
  • Secondly, manage your stop losses. This is your way of getting out of a trade if the analysis is wrong.
  • Finally, you need diversification.  This is making sure that you’re not unintentionally getting overweight in the same trade by trading currency pairs that are correlated and it makes sure that you’re spreading your risk around.

Trade Plan Tune-Up

Fine-tuning your trading plan is key.  This includes backtesting, forward testing so you know the expectancy of your strategy and record keeping so you can track your trading performance over time.  This will help to adjust your strategy when necessary. This part of your trading plan is vital to your longevity in this business because the only constant in the market is that the markets are constantly changing and you’ll need to fine-tune your strategy and update it once and a while.

I would suggest that you revisit your trading plan every 3-6 months depending on the amount of time you have been able to set aside for trading.  If you feel that you are more experienced you might want to start trading on shorter time periods or expand the currency pairs that you are trading.  Regardless of if you update your plan or not, you should continually come back to it to make sure that your execution is in line with your plan.

Trading Forex and CFDs is not suitable for all investors and comes with a high risk of losing money rapidly due to leverage. 75-90% of retail investors lose money trading these products. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.