A trader without a trading plan is the same as a driver not knowing where he is going. If you do not know where you are going, how do you expect to get to your destination?

Having a trading plan is as important as London Taxi driver having the “A-Z!!!!” (a road atlas in the UK). It is a very important part of the puzzle to get you on, and keep you on the road to becoming a consistently profitable trader.

A lot of FOREX traders who are learning the business will remember to say to themselves to do a trading plan for each trade. Bu then, they do not do it, they don’t see the importance. They get into trouble and watch their account go up in smoke. They trade with emotion; you cannot allow emotion to come into your trading. But that is another story (A good short book is Emotion Free Trading if you get the chance to read it).

We talk about discipline and making a trading plan for each trade is part of that discipline. Any successful trader will tell you they make a plan for every trade and will tell you the importance of it.

Discipline

Also patience, Patience and discipline are what make up a trader. Have the discipline to Plan your trade and then the patience to let it play out. Now I am not saying that by planning your trade and then having the patience to carry it out will make you have 100% winners... not at all. However your winning % will improve dramatically.

Now you come to the next hurdle, when you see your account rising, you must keep the discipline that got your there in the first place. The danger here is the reason why so many traders ride the cycle of the boom and bust system. Being aware of this danger along will help you keep that patience and discipline. If you forget what got you there, you will sabotage your account... trust me.

Ok, so I have gone off on a tangent now. So what exactly goes into making up a trading plan? That is a question with a lot of answers; all I can write is what goes into mine. Remember making a trading plan is only one part, you then have to actually carry out your plan.

Look for your entry:

Entry

Look at the trend on the higher time frames, Daily, Weekly and finally 4 hour charts. Look for support and resistance and if price is at either of these levels, I look for a candle pattern to tell me that the support or resistance is going to hold. It may be a pin bar, evening star, morning star, bearish engulfing, bullish engulfing, dark cloud cover, piercing line etc.

Stop Loss

Ok so we now have our entry, we now need our stop loss. I look on different time frames for forms of resistance (lets imagine I am planning a short position), Have I got any EMAs above price, have I got any pivots, daily or weekly, Is there another level of resistance just above this level etc.

What I am looking for is multiple reasons and multiple levels of resistance between my entry and my stop.
 

Ok for the sake of this, let’s say I have an EMA 10 pips above, a 61.8 of my daily fib 20 pips above, the weekly pivot is 32 pips above. Now I do have 3 forms of resistance between my stop loss and my entry. So my stop is going to be 32 pips + the spread (let’s say 3 pips) + 2 pips = Stop Loss 37 pips.

Lot Size

Ok so now I have my stop loss, my entry what about my lot size. I work out each trade to 2% of my account (and I have a rule that I never risk more than 5% of my account at any one time i.e. if I place trades and have risked 5% of my account across 3 trades and I do not yet have my stop loss to break even then I cannot take any more trades).

Let’s say we have an account of 10K, so let’s do the maths:

2% of 10k = $200, so we are going to risk $200.

Now we need to know how much a pip is worth for our stop loss. $200 / 32 = $6.25c
 

So now I know that each pip is worth 6.25 and I will not lose more than $200 on this trade.

Targets

Now we need our targets. During these months I follow these rules. 20 pips I take 1 third off my trade and my Stop moves to break even. , 40 pips I take the second third off my trade and the trailing stop kicks in.

I would have looked for targets that would be around those levels for my targets, but I do prefer to leave my final third run with a trailing stop. You will be surprised how far it goes. Of course you do get your stop taken out, but the times it does run far outweighs the time it does not.

So in a nut shell that is how I plan a trade. I use different time frames. I never take a signal off any time frame lower than the 1 hour chart; I do prefer the 4 hour chart.
Do not get greedy. When price hits your target, take it off. Do not think “Oh I will leave it on just in case it goes further” That is greed. When it hits it, bank the coin.

Contributed by: Swanky Markets