Newbie Forex Trading Plan

Newbie Trading Plan

1. Follow your plan.
2. One time frame.
3. One market.
4. One signal.
5. One contract.
6. Determine your risk before entering a trade.
7. Set a stop immediately after entering a trade.
8. Determine exit before entering a trade.
9. Record on paper all of the characteristics of each trade.

Two through four of this plan is a matter of simple choice, not much to debate; and more or less a no-brainer. Number one speaks for itself. If you don’t follow your plan exactly, when something goes wrong, you will not be able to analyze it and dissect the problem. You must treat trading like a business and not a video game if you expect to succeed. By sticking to your plan and recording what was happening when you entered and exited a trade, you stay focused, regardless of what happened. It gives you a frame of reference and a plan to succeed the next time you encounter the same set-up. When you encounter the trade again with a successful result; it provides you with something that money can’t buy: psychological capital. It might come as a surprise, but trading is not a skill. The market is a battle of the bulls vs. bears/buyers vs. sellers/up vs. down. Trading is a battle from within. The market never changes, only your perception of it. Your trading plan keeps your mind focused on your reaction to market and away from the mind games that are created from fear and greed.

The use of one time-frame eliminates the confusion created by ambiguous and conflicting signals. It is a matter of personal preference as to which one you chose. Which one? The time-frame that you like best is usually the one that shows the best set-ups for your style of trading. A time-frame that’s too fast is a typical problem. The bottom line is: if it’s not working, make a change. The five minute time-frame is probably the best one to use, at least while confidence is being built because is gives you 3-4 minutes to decided if you’re going to take a position.

Every market has its own unique characteristics and staying focused on one allows you to know in a general way, what to expect in various situations, freeing you to react to CCI signals and staying focused on your plan. For new people the YM provides excellent trading opportunities by trending well on most days and when the transition is made from simulation to real money, the $5.00/point contract allows for a more forgiving outcome if the market turns against your position.

Learning and becoming proficient with one signal at a time; knowing exactly how to react when presented the opportunity is a practical way to stay focused on your plan. The ZLR is best CCI signal to begin trading because it is nothing more than a retrace; a pull-back creating a buying or selling opportunity. There are at least 4-5 good ZLR trades using the 5 minute YM on any given day.

I have heard it said that if you can trade one contract, you can trade two. I believe that to be true, but I also believe the reverse; if you can’t trade one you can’t trade two. My question to you would be: why risk twice as much psychological capital as necessary?
Remember, this is not a video game. Losing 30 ticks with one contract in 4 separate trades and then making it all back with 4 contracts in one trade is pure luck. You might be able to do that once in while, but over the long haul, it does nothing to build confidence, focus and psychological capital. There is no such thing as a lucky trader.

Six through nine is where the rubber meets the road. You must determine your risk before taking a position. This is not a mystifying, hard to calculate, complicated formula. It is simply, how far you are willing to let a position turn against you before you exit; your tolerance or aversion for risk. The reasons you have to determine risk beforehand are to not only save capital in a losing trade, but also to keep your mind out of the hope mode. When you close a losing trade, you stick to your rules and you can take comfort that anything can happen, which in turn leaves you prepared in a positive mode to watch for the next signal. Conversely, if you don’t have rules to trade by, any loss will leave you wondering what happened, making you feel alienated from the flow of the market. That will cause pain. Pain will cause psychological capital to be deducted from your mental account. A stop is an essential part of trading. One never knows when a program trade will go out of control causing a sudden spike in price, taking down everyone in its path. As a trader, you know that anything can happen. After entering a position you could put a stop two ticks above/below the entry bar, backing it up 5-6 ticks to allow for backing and filling. The CCI is a momentum indicator, if the move is good, momentum will continue. If the bar is too long; more than 10 ticks, pass on the trade. If you see the market turning against your position you can exit the trade before it hits your stop. A trader must recognize when a trade is not working; exiting as quickly as possible. This is the root of money management. All of these decisions will depend on your tolerance for risk. Separate but closely related to determining risk and setting stops is when to exit a winning trade. There is probably nothing more demoralizing than to allow a winning trade to turn into a break-even or a losing trade. Targets can be set or simply using the movement of the CCI.

I do not wish to speak too much of the mechanical aspects of entry and exit because those decisions are personal and individualistic. Keeping track of stats allows a trader to examine very closely, not only losing, but also winning trades. Next to your computer should be a piece of paper with the details of entry, stops, exit, drawdown, MFE, angle of EMA, color of LSMA, TCCI and whatever data you feel is pertinent. Clint from Texas has explained stats keeping in an excellent presentation that can be viewed on woodie’s website. It keeps your mind focused on the trading plan and away from the temptation of making up trades, no matter what the outcome. The entire plan lays the groundwork that builds a bridge from your inexperience as a trader to intuitively knowing what will probably happen before it does; operative word: probably. We as traders never know the outcome until it happens. A trading plan is really a picture of the health of a trader, similar to a balance sheet which is a snap-shot of the health of a corporation. Staying focused and following your plan gathers psychological capital and builds the confidence that traders need to survive.

It’s a good idea to have written in a separate place away from your computer, all telephone numbers for your trading company, internet service provider and data feed companies for emergency, in case of a power outage. You might have to exit a position by an alternate means.