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 Why Is a Forex Trade Plan So Important?

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Why Is a Forex Trade Plan So Important? Empty
PostSubject: Why Is a Forex Trade Plan So Important?   Why Is a Forex Trade Plan So Important? Icon_minitimeFri Jan 01, 2016 12:40 pm

Do you ever enter a trade without a trade plan in place? Or find yourself second guessing every decision you make whilst in a live trade. If so this article maybe of some interest to you and may shed some light on how you can eradicate the major pitfalls that can arise if you enter trades unprepared. The best form of preparation is to have a plan before entering, this gives you something to follow and keep you on the correct path when things get tricky.

So lets begin with what a trade plan is and why it is such a crucial part of managing your trades. If you currently do not use trade plans in your own trading routine, I seriously urge you to continue reading and consider carefully the importance of introducing trade plans to your own trading routine.

Trade plan basics
A trade plan is quite simply a plan you produce in advance of entering any trade. The trade plan sets out all the critical information you need to manage the trade to its completion. The plan is always decided before entering any trade, never afterwards and details precisely where you will set your entry, stop loss, take profits and when to amend your stop loss.

It doesn’t need to be a 1,000 word document but it does need to be accurate and concise to avoid any confusions later on. It’s the guide you use to manage each trade, to try to help give trades the best chance and also provide a solid frame work for you to follow to reduce over analysis. Once a trade plan is set in place, it needs to be obeyed otherwise the plan is simply worthless.

Why are trade plans so crucial?

The role of a trade plan is to prevent you from not just over analysing and messing around with trades but also to give you strict rules to follow, once entered into a trade. All the analysis we need to do should be carried out prior to entering any trade. We have all the necessary information we need in the past data on the charts, to work out how we should manage each trade. Choosing how to manage a trade before entering has the advantage of allowing us to make clear and focused choices, when there is no money on the line.

The problem with making decisions whilst money is on the line is that we can have our judgement clouded by pressures to preserve money. Trade plans which are worked out before entering a trade, relieve this pressure and keeps the decisions we make as consistent as possible. Once we enter a trade the choices have already been made and we merely have to let the market do its thing, trust in our analysis and follow the trade plan through.

Starting point
The first thing I look at when determining how to construct a trade plan is whether the trade is a trend trade or a counter trend trade, this determines how ambitious I will be with my take profits and where I will move to break even. I personally have two slightly different but very simple trade plans which I use for each different type of trade and so for me setting a trade plan merely takes 30 seconds, if that. This obviously is all down to practice but once mastered you know straight away how you are going to manage the trade. Marking my stop loss, entry and take profits levels on the charts is the next step to keep a visual record of how the trade is to be played.

Coming up with set plans in advance for different types of trades speeds the process of working plans out dramatically and it also introduces a very important element into your trading, which is consistency. If you manage the same types of trades, over and over in a very similar manner not only will you be able to see what works and what could be tweaked but you will gain confidence in your own ability to follow trade plans to the letter.

I advise you to write down the actual trade plan as well as marking the levels on the charts. It is extremely good practice for you to keep these plans written down for each trade you take so that in the future you have a record of every trade. Having these records can assist in analysing your previous trades to see if any alterations could be made to increase performance.

Alternative approach
The alternative approach to devising trade plans prior to entry is to enter trades blindly and managing them on the go, with no prior plan to follow. This lazy approach in my opinion is not only a very unprofessional approach to trading but also encourages mistakes to arise. The main problems that can arise when you try to make important trading decisions under pressure are that it allows the markets to gain an element of control over your decision making and inevitably affect your trade decisions for the worse. It’s very hard to be consistent in your approach if you have no system in place and have to make decisions under pressure.

Stop sabotaging trades!
Even if you set out  with good intentions and produce trade plans prior to entering trades, you will probably find you have had or still do have, a tendency of messing around with trades once entered into them. Interfering with live trades usually results in the increased risk of sabotaging perfectly good trades through a lack of discipline and the inability to follow rules. Thinking you need to out-smart the markets is a big mistake many traders make and knowing when to sit on your hands and leaving trades alone is a key part of trading.

If you find you struggle with the art of letting trades pan out by themselves, then you definitely need to look into why you feel the need to interfere. It could be you just don’t trust your own judgement or can’t control the fear associated with losing a trade. I have been through all of these issues and over the years I have incorporated and used a few techniques to prevent myself from sabotaging trades and I will now go through a few of them with you.

Be a disciplined boss!
The first technique is designed to prevent yourself from deviating from the trade plan itself and it basically involves the process of penalising yourself if you fiddle with the trade once entered in. The penalty can vary but an example of one I have used in the past, was not being allowed to trade for a set period of time, like a week for example, if I broke the rules.

If you do break the rules the penalty must be enforced. This may sound simple but it does rely on your own discipline and honesty to carry out the penalty. Being your own boss means it can be very easy to let slide minor lapses but this cannot happen. The only person you are cheating is yourself, if you don’t follow through on penalties incurred from breaking your own rules there is little point in having them.

Learn to remove yourself from trades
The second technique is to physically remove yourself from the trade itself to help prevent yourself from over monitoring a trade. This can be achieved by using simple price alerts and only allowing yourself to check the charts when price hits a set level. Being able to switch off and disassociate yourself from a trade is very important. I understand the need to see how a trade is getting on but as we have no control over the markets, what happens to the price once you enter a trade is completely out of our control and will cause undue stress. The reason we feel pressured to follow trades too closely is mainly because of the fear of losing money, this is why we need to be able to learn to disassociate ourselves from live trades to prevent the fear of losing to control our decision making.

Stick to the same time frames
Another important technique is to stick to the time frame the trade forms on and is entered on. Do not drop down time frames and begin monitoring the trade, this will only drive you crazy and will not produce any better results. Over analysis of live trades is a trader’s worst nightmare and a pointless exercise. So, for example if a trade setup forms on the daily time frame, only checking the trade once at the end of the day is fine.

Start today and incorporate trade plans into your routine!
So I hope you can now see that a trade plan is a very important part of any trader’s routine and is designed to set in place a positive structure to how you are going to manage each particular trade. The ability of a trader to follow their trade plans to the letter is down to pure discipline and the trust in their own analysis, which ultimately grows with time.

Learning to switch off and leave trades alone is not a simple process and it’s always very tempting to have a sneak peek at a trade before it hits a desired level. The question you have to ask yourself is, what good will this do? If price is going against you when you take a quick peek, will this add to the stress of the trade or alleviate it? We both know it will certainly not help and the trade will probably be stuck in your mind with you wondering if price is still going against you or turned around in your favour. These worries are just troubles we need to eliminate from our trading as they produce no positive effects.

I want to make this very clear, nothing good comes from watching trades and you need to realise this very important fact, incorporating this into how you manage trades will give you more time away from the charts and let the trades pan out on their own as they should do.

By incorporating and using trade plans properly you will find trades are much less stressful and the whole process of trading will take far less of your time up. Trusting your own analysis and believing in your own management skills takes time and practice but once mastered you begin to understand and accept that any trade has the potential to fail but this will always be out of our hands. What you must concentrate on is how you manage each trade and keep everything as consistent as possible to give yourself the best chance of succeeding.

Trade plans are a very simple and effective tool if used properly, not only do they improve your trade management skills but they teach you the importance of being able to remove yourself from trades.

If this article has been helpful or you have any questions regarding trade plans please leave any comments below.


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