Planning Your Currency Trading
What Is a Trading Plan?
A trading plan is a systematic trading method, a strategy, set by an individual trader in order to evaluate assets, return and risk. Thus, a trading plan includes a trader’s strategy, risk management, money management and trading rules.
It is basically a guideline that the trader himself has created in order to follow those rules by discipline so that he can achieve his trading targets.
A trader must not be affected by emotions as this might cause him to deviate from the rules, raw trading and strategy rules must be followed every single day in every single trade in order to have successful trading results. The importance of a trading plan is that it lets you know if the trades are in the right direction or not. As renowned fund managers state, “the trading plan you use is not as important as having a trading plan.”
How to Determine Your Trading Plan
In order to create a trading plan you have to identify your risk appetite. Are you a risky trader or do you prefer to risk less and get less? Of course this depends on your capital and how much of it you can afford to lose. A good trader shall not be driven by emotions and risk more than what he can afford to lose.
The risk appetite of a trader is also closely related to the return he would like to have. You may be tempted to laugh now, thinking think that the more profit you get the better, but think again. If you go for much, you have to risk much as well. Maybe it all goes right and you win all those pips, but what if it goes wrong and you lose them instead? Both scenarios are possible.
One important step in determining the trading plan that you are going to follow is to calculate your drawdown. The drawdown is the percentage of your initial capital that you have lost. The larger your drawdown is, the hardest it is to recap. Drawdown is the peak to bottom decline during a specific record period of an investment or of a trade. It is the money you have lost divided by the initial money of the investment. For money management purposes, the maximum drawdown one shall have is 20%-25%. Let’s illustrate the reason with simple examples. Let’s say that you decided to have a 20% drawdown. So, if you lose 20% of your capital, how much do you need to gain in order to recover? The answer is simple: 20% divided by 80% (the remaining capital) which equals to 25%. 25% to recover and then even more to have a gain again. Now, if your drawdown is 50%, you would need 100% win ratio to recover! And so on and so forth.
Another factor in choosing a trading plan that fits your personal lifestyle is exactly the way of your lifestyle. You must ask yourself and reply honestly to the question of how much time you can really spend on trading. There are traders who keep long term trades and do not have to be in front of the monitor all the time and there are others who have a lot of time to trade and they are in front of the screen the whole day scalping around. A trading plan is a list consisting of many points, which you should check and tick before you proceed with every new trade. If as little as one condition of your list is not met, then you have to think twice before proceeding with the trade. Remember, consistency and discipline is the key to success.