Having a Winning Trading Plan

Trading in the financial markets is surrounded by a certain amount of mystique because there is no single formula for trading successfully. There is an old saying in business: "Fail to plan and you plan to fail." It may sound bull, but those who are serious about being successful, including traders, should follow these eight words as if they were written in stone.

Just ask any trader who makes money on a consistent basis and they will tell you, "Have a plan, or fail."

Approach

Before you start to trade, recognize the value of proper preparation. The first step is to align your personal goals and temperament with the instruments and markets that you can comfortably relate to. For example, if you know something about retailing, then look to trade retail stocks rather than oil futures, about which you may know nothing.

Market (Instrument)

You will find that certain instruments trade much more orderly than others. Erratic trading instruments make it difficult to produce a winning system. Therefore, it is necessary to test your system on multiple instruments to determine that your system's "personality" matches with the instrument being traded.

For example, if you were trading the USD/JPY currency pair in the forex market, you may find that Fibonacci support and resistance levels are more reliable in this instrument than in some others. You should also test multiple time frames to find those that match your trading system best.

Time Frame

The time frame indicates the type of trading that is appropriate for your temperament. Trading off of a five-minute chart suggests that you are more comfortable being in a position without the exposure to overnight risk. On the other hand, choosing weekly charts or a daily chart indicates a comfort with overnight risk and a willingness to see some days go contrary to your position. It is important to understand the difference and to know your Risk.

In addition, decide if you have the willingness and time to sit in front of a screen all day or if you would prefer to do your research quietly over the weekend and then make a trading decision for the coming week based on your analysis. Remember that the opportunity to make substantial money in the markets requires time. Short-term scalping, by definition, means small profits or losses. In this case you will have to trade more frequently.


Methodology

Once you choose a time frame, find a consistent methodology. For example, some traders like to buy support and sell resistance. Others prefer buying or selling breakouts.

I will talk more about the trading breakout technology in detail in my later post.


Set goals

Before you enter a trade, set realistic profit targets and risk/reward ratios. What is the minimum risk/reward you will accept? Many traders use will not take a trade unless the potential profit is at least three times greater than the risk.

For example, if your stop loss is a 1% loss per lot, your goal should be a 3% profit. Set weekly, monthly and annual profit goals in dollars or as a percentage of your portfolio, and re-assess them regularly.


Risk Control

In the end, successful trading is all about risk control. Take losses quickly and often if necessary. Try to get your trade in the correct direction right out of the gate. If it backs off, cut out and try again. Often it is on the second or third attempt that your trade will move immediately in the right direction. This practice requires patience and discipline but when you get the direction right you can trail your stops and almost always be profitable at best, or break even at worst.


Start Over

Starting over after losing a couple of trading would affect one's confidence. My suggestion , Get over it or you will not make it as a trader. If your stop gets hit, it means you were wrong. Don't take it personally. Professional traders lose more trades than they win, but by managing money and limiting losses, they still end up making profits.


Keeping a trade LOG

After each trading day, adding up the profit or loss is secondary to knowing the why and how. Write down your conclusions in your trading journal so that you can reference them again later.