The Importance of Having a Trading Plan - Part 2

In Part 1 of The Importance of Having a Trading Plan we talked about Goal setting and how to plan which markets you are going to trade and with what strategies. These are two key subjects in which your trading plan should now cover. Hopefully everyone has started putting together their trading plans for 2015 and hopefully Part 2 of this article helps you finish them off. In Part 2 we are going to take a close look at how to include Money and Risk Management, Daily Trading Routines and Record Keeping in your trading plan.

Money and Risk Management is probably the most important section of a traders trading plan. If you are able to control your risk properly it ensures you won’t blow your account and it ensures you stay in the game. In this section you want to define the maximum amount of your trading capital that you will put at risk on any one trade. Here at Trade with Precision we recommend that you risk a maximum of 1% of your trading capital on any one trade. So figure out what the number is for you and write this down in your trading plan and don’t ever break that rule! You will also want to think about a risk management rule that keeps you in line on a losing streak. Something like “If I have 5 losing trades in a row I will take 2 days off trading and use that time to go back and analyse my last 5 trades to see if I am making any mistakes”. This type of rule will make sure that your drawdown’s are limited as well as they can be. Another rule to think about is to make sure you have something that accounts for if you have two different trades on at the same time that are both influenced by the same currency. So you could introduce a rule like “I will only ever risk a maximum of 1% at any one time on a single currency or product”. This might force you to risk 0.5% on each trade if you are entering into long entries on say both EURJPY and AUDJPY on the same day. By doing this you would then still only have 1% of your trading capital exposed to moves in the Yen at any one time. A quote by Alexander Elder sums up this section well “ A good trader watches his or her capital as successfully as a professional scuba-diver watches his or her air supply”.

In any professional arena it’s important to have certain routines to get you into the zone you need to be in to perform at the highest level possible and trading is no exception. Take the All Blacks Rugby team as an example, every week leading up to a match the coaches and players will all have very specific routines they go through until the first whistle blows to prepare themselves for the game to make sure they are at their peak performance for the next 80 minutes of rugby. To be a professional trader we need to lay down some specific trading routines that we execute day after day. This may involve having set times each day in which you scan the markets looking for trading opportunities. It might even help for you to have various alarms set at certain times throughout the day to remind you to scan the markets. Whatever your routine might be, at least make sure you have one that is structured and allows you to repeat the same processes day after day.

Record Keeping is vitally important in any trader's journey as it helps you to analyse your performance,  which will assist you in making improvements to your trading. We recommend that you record various details on every single trade you take. These details include amount risked, position size, entry, stop and target levels and the date and time the trade was taken. You should also be keeping an excel spreadsheet tracking your account balance once each trade is completed so you can track your overall performance. We also encourage all of our clients to take screenshots of every single trade they take across all of the relevant timeframes. If a trader can keep all of this information then it makes it a lot easier for them to analyse how they are trading and it helps to figure out what they are doing right and wrong so they can make adjustments. If you aren’t keeping good records like this how do you expect to learn from your past trades. Writing these sorts of aspects down in your trading plan will give you the discipline to stick with these rules! Record Keeping is key!

We hope these Trading Plan articles have been valuable and inspired you to put together your own trading plan, which you can use to keep yourself on the right path to consistent trading success.

Happy Trading!

Regards,
The TWP Team