All successful traders have one thing in common-a trading plan. A trading plan is a formal statement of set goals, the reasons why they are attainable, and the plan for reaching the goals. The plan should include your goals, objectives, rules and your overall trading strategy. Here are some things you may want to consider before you start to trade.


What are your goals?
To make money, find a hobby, challenge yourself and see if can beat the market. Is trading a vocation or an avocation? Successful trading is tough and there can be a fairly steep learning curve. It’s important to know why you want to trade because if you don’t, you may find the cost of tuition expensive. Setting up a trading plan may lower your cost of tuition.

Setting up a trading plan
First you must ask yourself what type of trader you plan to be, day trader swing trader short-term or long-term trader, position or scalper trader. Next, determine whether you will use technical or fundamental analysis or a combination of the two. These are not easy choices and will require some study on your part. You will have to experiment with what type of trading your best suited for and works best for you.

Establish a trading routine
You need to determine a time for analysis of the forex markets, a time to trade, and a time to evaluate your trades. Your trading plan should include the risk for each trade, size of the trade, which currency will be traded, criteria for entry and exiting a trade and timeframe for the trade –short term or long term? These are suggestions for developing a trading plan, the list is not exhaustive and it will require a good deal of trial and effort to find what works for you. It is worth it to put in the time because a key benefit of a trading plan is it will help make you more consistent. Consistency will increase your chance of success in trading.

Here are some examples of what you may want to incorporate in your trading plan:

• 1) For trend following, you may want to use channel breakouts and simple or weighted moving averages,
• 2) If you choose to rely on technicals in your trading plan, you could use chart pattern recognition like gaps, triangles, flags head and shoulders, double tops and bottoms and compliment chart analysis with oscillators and stochastics to try and determine if a market is overbought or oversold,
• 3) You may prefer to use prediction techniques like Elliot Wave, Gann and Dow Theory
• 4) If your trading plan is to include fundamental analysis you may want to review the article on fundamental analysis,

The heart of a trading plan is money management
A major key to successful trading is to control risk. Money management is the key tool to control risk and a vital part of any trading plan. Money management will help you to not loose all your risk capital on any one trade so you can “live to trade another day”. There will always be losses in trading forex and you must keep the losses at a minimum if you are to be a successful trader.

First rule of money management is to risk only a small portion of your risk capital on any trade. You will need to calculate a risk reward ratio before each trade. As a general rule traders will look for a 3 to 1 profit to loss risk ratio. If you use the 3 to1 risk reward ratio or a similar ratio it will greatly increase your chance of trading success. Second, use protective stops. You can use a set dollar amount (equity stop) or a chart stop. Chart stops are usually derived from a moving averages, support and resistance, channel breakouts etc… Third, set an objective for your trade. Strive to let profits run and use stops to cut losses.


Do not let emotions of hope, fear and greed or hope get in the way of your trades
Psychology of trading is important to money management .Your mindset will be key to successful trading. A positive mental attitude coupled with a trading plan will increase your chance of success and keep emotional trading decisions at a minimum.

Here are a few rules to keep in mind-don’t get married to a trade, its usually best not to add to a loosing position and learn to take a loss. One of the hardest things is to take emotions away from your trading. Letting emotions dictate your decisions is the greatest treat to trading success. A trading plan will help take emotions out of your trading, keep you going in the right direction and give you better chance of making a profit. If you cut your losses, you can preserve risk capital and take advantage of future opportunities. Your trading plan is your business plan.

We have only scratched the surface of the considerations for a trading plan in this article. You may want to take an on line course or hit the library for latest publications on this subject to get started. Finally I will leave you with this well accepted adage- plan your trades and trade your plan.


Test your knowledge

1. A trading plan should include ______, _____, ______, and ______.


2. True or false
   Money management is the key tool to control risk and a vital part of any trading in plan.


3. The two key types of protective stops are ______, and _______.


4. True or false
   Emotional trading decisions can be costly. A trading plan will help keep emotions out of your trading.


5. All successful traders have one thing in common ________.

1. Goals, objectives, rules and a trading strategy
2. True
3. Money and chart
4. True
5. Trading plan