Do you come out of the shopping mall with bag-loads of things you didn’t expect to buy? Then maybe you have an impulsive nature.
That’s one of the aspects to consider when constructing a trading plan – the type of trader that you are.
WHY YOU NEED A PLAN
A trading plan sets parameters around the trades you make and the processes you use – something that takes on added importance in highly volatile conditions. There are several advantages of using a plan but the over-riding benefit is that discipline can prevent you from blowing the bank on an ill-advised trade.
It is estimated that for every person who wins by diving into the market without setting trading rules for themselves, there are 20 who lose by being undisciplined. Not only do they blow the risk capital they’ve set aside, but they lose even more as they try to recoup losses that could have been avoided in the first place.
THE ESSENTIALS FOR EVERY PLAN
A main rule in any trading plan is to cut losses and, conversely, let profits run while a favourable trend continues. It’s essential to quit a losing trade before you lose too much. Similarly, set specific objectives, such as a target return on risk capital, or an expected percentage gain on winning trades.
Becoming more emotionally involved with some investments than with others inevitably means you overlook or ignore the cold, hard facts that tell you it’s time to exit a trade.
Get used to the idea that you are unlikely to win on every trade. This helps you cope with the negative emotions that hit you with a losing trade. It also enables you to take a rational, measured approach to trading. `
– Determine when to enter – this will come from your study of technical analysis and chart patterns or fundamental stgelopments in the markets you follow.
– When to exit – this can also be determined by studying chart signals
– Stop losses – extremely useful in fast-moving, erratic markets to manage risk. Make sure you know how to stop losses appropriately for your position, size and amount of risk.
– Limit rules – set limits on how much you put at risk in any one trade. Do your homework on this aspect to be sure you are taking sufficient measures to preserve your risk capital.
Experienced traders will tell you they have learned these lessons – often the hard way – and trade within set parameters. There are many trading tools available to assist you monitor the market, help establish entry and exit points and provide valuable data. You’ll need to explore which ones are useful to you and how you might combine some of these.
Your forex dealer may be able to provide a ‘practice account’ that includes many of these tools. Alternatively, specialist software that uses past FX market data to provide a range of trading conditions can be useful in testing your plan.
An internet search can also help you track down appropriate tools – but beware of high priced ‘black boxes’ that come with too-good-to-be-true promises. Before employing any tools in live trading you should test them – as well as putting your entry and exit rules to the test – to be confident your system will work.
Remember, the goal is for it to provide bigger profits on winning trades over time than the losses on losing trades.
Brendan Gunn, Sales Manager, GFT
Disclaimer: This article was written for informational purposes only, and is not intended to be used as advise. Trading is risky with or without the use of this information