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Something Interesting in Financial Video February 2014
Sergey Golubev, 2014.01.31 08:39
Watch the fifth episode of the "Traders Whiteboard" series and learn from master trader Adam Hewison on how to incorporate this key element into your own trading.
How to Build a Four-Point Trading Plan
The most important aspect of a trading plan is the definition of the
type of trader that you are. And if you’re a new trader and aren’t quite
sure of what type of trader you want to be, it’s ok to modify this as
you see more results and get a better idea of which direction you want
to move towards.
The benefit behind this is that it helps to keep you grounded. Let’s say
that you’re a technical swing trader, but with an upcoming NFP report
you see an especially attractive setup that you decide is worth of a
quick scalp position.
Well, if that scalp doesn’t work out and a loss is taken – the ‘what’ of
a trading plan serves as a reminder that you were trading outside of
your comfort zone.
A trading plan is worthless without a definition of ‘how’ a trader wants
to enter and manage positions. This can be as simple as ‘I’m going to
scalp trends,’ to as complex as ‘I’m going to take scalps with 8 period
EMA crossovers on the 5 minute chart when price is below the 34 period
It really just depends on how in-depth you want to be. The benefit of
having a more well-defined strategy in this portion of the plan allows
you to come back later to troubleshoot if results aren’t meeting your
expectations. A more loosely-defined strategy in this section of the
plan may lead to a lack of discipline when you’re actually placing
trades as the trader hasn’t made the commitment to the strategy by
integrating it as part of their trading plan.
An important note here – the strategy should be yours, customized for
your unique risk tolerance and personality. This should also mesh with
the ‘what’ of the trading plan, as this is an extension of the type of
trader you are.The ‘When’
This part of the plan is often missed by traders; as many markets
somewhat define when you’re actually able to trade. If you’re a stock
trader, well you have to adhere to open market hours. Even then, many
traders choose to focus on the first or last hour of the day, as this is
where the majority of volatility will often take place.
But in the Forex market, there is quite a bit more flexibility available
to the trader – and this isn’t always a positive thing. The FX Market
moves 24 hours a day, and will often display differing characteristics
based on the time-of-the-day and the area of the world that is providing
The importance of defining the ‘when’ of a trading plan is that it
allows traders to learn and improve upon their strategies and approach
with as few moving variables as possible. If a trader normally
implements their strategy during the Asian session, but for some reason
couldn’t get to sleep and finds themselves trading during the London
open with the same strategy; they are introducing an entirely new and
unfamiliar risk into their approach.
The last part of the plan is, in my opinion, the most important. This is
where you write down your goals and reasons for becoming a trader. This
can be as ambitious as ‘I want to be a billionaire,’ to as reasonable
as ‘I want to replace my income so that I can spend more time with my
family.’ I strongly encourage you to set realistic, honest goals
otherwise they’re nearly impossible to adhere to. I speak from
Trading isn’t easy. It can be difficult, and tough, and costly, and
frustrating all at the same time. Especially when we have fundamental
environments that, as we say in Texas, ‘is about as clear as mud.’
The ‘why’ of a trading plan serves as the reminder for why you’re
willing to go through the pain; and when times get difficult or a major
drawdown is seen on the account, this can help to provide perspective of
‘the bigger picture.’ This allows the trader to take a step back in
order to realize that the reasons they want to become a successful
trader are worth any trials or tribulations that they may go through.
If the goal doesn’t seem worth the frustration any longer, then at the
least you know its time to take a step back and either re-evaluate your
options, or quit.