A Guide to Streamlining A Forex Strategy and Trading Plan
An intellectual creation often requires several drafts to get correct. Exceptional authors do not simply create a magnificent manuscript nor does the artist go from blank canvas to masterpiece. It must be revised, edited, and streamlined to create an exceptional final product. A trader's forex trading plan and strategy are no different. This article assumes that you already have the basics of your strategy and trading plan developed. It will instead look at the kind of revisions and clarifications that need to happen to help a trader attain and maximize their profitability.
Specifics Are Of The Utmost Importance
The first point we need to address is clarifying any ambiguities or intangibles that may be lurking in the strategy or plan. The most common place to find these is with Japanese candlestick trading signals. It's easy to define crossing a 30/70 RSI line or a Fibonacci level. But how does the trading plan define an actionable pin-bar, engulfing bar, or any of the other dozens of candlesticks signals that forex traders often use? Eliminating suboptimal signals comes down to defining what an optimal signal looks like.
We will use pin-bars and engulfing bars as examples due to their popularity.
WRONG: A pin-bar formed at a swing high/low near support/resistance.
RIGHT: An actionable pin-bar forms at a swing point that includes the following features:
1. The pin-bar favours the trend.
2. The pin-bar is clearly defined and sticks out clearly from price movement.
3. The pin-bar opens and closes within the previous candlestick.
4. The tail of the pin-bar is at least 3 times longer than the body.
5. The pin-bar forms on a Support or Resistance level.
6. The pin-bar's size is comparable to the previous price movement.
WRONG: An engulfing bar forms at a swing high/low near support/resistance.
RIGHT: An actionable engulfing bar forms at a swing point that includes the following features:
1. The engulfing bar favours the trend.
2. The engulfing bar clearly encompasses the previous candlestick.
3. The engulfing bar must close near the favourable end of the candlestick (within 1/4 of the end).
4. The engulfing bar must be clear, distinct, and not of small size.
5. The engulfing bar forms on a Support or Resistance level.
6. The engulfing bar should have a similar size or larger than recent candlesticks.
Though the previous two examples are similar; take note of how they clearly define the candlestick signals without any ambiguity at all. Traders too often find themselves struggling to find the "right" signals when they should have the "right" signals in mind already. At that point, it becomes less hunting for the right signals and more just catching them when they jump right off the charts!
The argument is often made that traders should not necessarily confine themselves so much. This belief is mistaken. All signals are not created equal. Some are much better than others due to chart location, structure, and market conditions. Eliminating those suboptimal signals is imperative to profitable trading. It is so much easier to lose money in the forex markets than make it.
Overlooked Additions To Trading Plans
Trading plans are as individual as the various forex traders that author them. Each must take into account the various strengths and weaknesses of the trader that is using it in addition to their strategy. Neglecting the personal aspect of a trading plan can create a suboptimal atmosphere for the trader to attempt to profit in.
Do the chosen pairs and analysis time coincide well for the trader?
Scalpers are typically more active during volatile times that can help produce clean chart movements. On the other hand, a person trading the daily charts may benefit from sticking to the Majors and analysing after the New York session. USD pairs typically slow down after New York closes, allowing a relatively placid time for their analysis.
Should there be Timed or Advancing Stops imposed by the trading plan?
It's no secret that Stops should be clearly defined in the trading plan and strategy. Many traders tend to overlook the use of Timed and Advancing Stops to help minimize their potential losses. The idea behind these Stops is to minimize exposure and risk in the market. A Timed Stop simply states that the trader will pull out of the trade if it is not profitable within X amount of time. The idea is that reversals typically have volatility if they are going to hit hard. A volatile reversal won't require more than a few periods to make some significant gains. An Advancing Stop is one the trader simply moves in favour of the trade as it gains. That way if it doubles back, the trader will not lose any money. A forex trader that wants to employ these tools should define the number of periods or when to advance the stop clearly.
Does the trading plan detail when it is time to stop trading?
Every trader runs the risk of getting so engrossed in their trading that they might overlook stepping past their limits. Frustration and anger are normal parts of being human; but they are also tremendously bad for profitability. Several angles should be covered, including but not limited to; when to take a break after winning or losing trades, handling losses in the market, calming oneself before analysis, and when it's time for an extended break. Many newer and intermediate traders do not realize the markets slow down drastically as Christmas approaches. That is a great opportunity to take some time off until after the New Year if looking for a significant block.
Are limits imposed for short-term traders to prevent undermining their profitability?
Not all short-term forex traders require limits to protect what they gain. Some do tend to impose a limit on their own winning to prevent the mistakes that come with overconfidence. A scalper may choose to stop trading after a set number of wins and a certain profitability is reached. The comfort level could be as low as a dozen or as high as dozens of trades. Like so many things in forex trading, it is a matter of subjective opinion for the individual trader. Some may want it, some may not. A short-term forex trader that finds themselves losing money as the day grinds on may well want to impose such a limit in their trading plan.
Don't Forget To Acknowledge The Trader Behind The Plan
An essential part of any trading plan is a little information about the trader using it. What are your goals and motivations for learning how to trade forex? Why do you keep on analysing and waiting to see where that price points ends up moving? What keeps you working towards forex success?
It's important to include this information in a trading plan so you have something to give you a tangible reminder of why you're investing all of this time, energy, and work into forex. It's helpful to read when you've had a losing day or you're ready to give up. Listing out your goals clearly makes them more tangible, and therefore, attainable in your mind. That is true of about any goal you may be pursuing in life.
Ensure The Trading Plan Is Personal
Traders often look to the internet to find trading strategies and plans that will help them succeed in forex. There is no more important lesson than understanding the very personal nature of forex trading. Yes, many people use strategies and plans that share similarities. That does not change the fact that each trader is an individual with his or her own ideas on what makes for a successful strategy. One can take five traders using the same system and wind up with completely unique symbols based on how each of them interprets the information.
That uniqueness must be accounted for in the trading plan. You have your own risk tolerance, ideas on how to succeed, and personality. Some people love the fast-paced nature of scalping while others prefer trading on daily or weekly charts. There is no wrong way for you to trade forex- there's only profitable or not profitable.
This post was written by Daniel Lindsay.
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