Creating a Trading Plan – Part 1
It is common knowledge that new Forex trader’s fail 80% of the time. This is because many beginners start trading without a clear plan. A premeditated plan is crucial when you trade. Trading without a plan is like going to war without an attack and a defense plan. Before you go into a battle you assess your capability, your strengths, and your weaknesses. The same logic applies to Forex – you prepare a plan that helps you base your trading on your strongest features and avoid the weak ones.
Your available funds
Before you start trading you should decide how much you want to risk on a single trade. The professional retail or institutional trader doesn´t risk more than 2-3% of their account in one trade. I do the same and I suggest that you follow the same rule. It doesn´t matter how small your account is, if you want to be in this business for the long run you should stick to it, the rewards will come eventually.
Let´s say you start with a very small account of $2,000. You want to risk 3% of your account for every trade; your stop losses are 60 pips and take profit targets 40 pips. So, how do you calculate the lot size? It´s easy, 3% of $2,000 is $60, so you risk $60 for 60 pips. That is $1/pip and since 1 mini lot accounts for around $1/pip, your trades will be 1 mini lot or $10,000. That gives you a 1/5 leverage, which is very reasonable.
Let´s be conservative and say that you use 1/1.5 profit/loss ratio. At the end of the day, you end up with just one net winning trade. This means that you make 2% profit a day or $40 in real terms, which might not seem like a lot to some. But don´t let that first impression discourage you, that´s 10% profit in a week; therefore your account is 10% bigger.
We know that in forex profits increase exponentially, so in the second week you increase the lot size 10%, in the third week to 11%, in the fourth week to 12% and so on. In about 7 weeks, your account will have doubled and in 12 weeks your account will be three times as big as the initial one. By that time, you can alter your money strategy. You can withdraw half of the monthly profits and leave the other half, in order for the account to keep growing.
Your available time to trade
The next step is to distinguish how much available time you have for trading. Professional traders whose job is trading, don´t stand in front of their screen nonstop. They take 30-minute breaks every 2-3 hours and don´t work more than 8 hour shifts, otherwise judgment becomes impaired and we know that it is of the uttermost importance to keep a clear head when trading. Many people have full-time jobs, so they cannot follow the markets continuously. Even if you´re not working full time, you might have other preoccupations and it´s not advised that you keep staring at the charts for 12-14 hours like a zombie.
You need to know what your trading hours will be, whether it´s 30 minutes around midday, during the afternoon, or throughout the day if you´re not working. The statistics show that nearly 40% of people trade while commuting in the morning or during lunch breaks. The best trading strategy for them would be scalping. Our short term signals here at FXmarketleaders offer good opportunities for this group of traders.
There are traders who only have time to look at the charts when they get home in the evening. At that time of day the market activity is very low. They have better chances if they trade the bigger timeframe charts, like daily or 4-hour charts. These are swing traders and they can use our long term signals, apart from their own analysis. The other group is the daily traders who have access to charts and markets any time of day. This type of trader can use whatever timeframe they feel most comfortable with and they can follow all our signals as well.
The trading plan is a very important aspect of trading, so we want to elaborate on it thoroughly. Therefore, this article will be nearly twice as long as our other strategies, that´s why we are dividing it into two parts. It will be easier for you to digest the information and build your own plan step by step. We will complete the second part of this article next week, in the meanwhile, get to work on your trading plan.