Do you have a Plan to 'Trade To Win' or 'Trade to Lose'?

The cliché “no plan is a plan for failure” is so true when it comes to investing and trading real money in the financial markets. New traders with fake money demo accounts have no plan either most times. Pro-traders would never trade a real money account the same as amateur traders with demo accounts. Use fake money demo trading accounts to practice and hone your trading skills, and see if your different trade plans will work by trading weeks on end, monitoring the results, before trading the plan with real money live accounts. But remember, you have apply the same discipline from a real money account to the fake money demo to simulate the same real market conditions and the ability of your trading account, and your mind to be successful in trading. If you don’t, the results from the demo account are most times false, useless, and setting you up for a real money loss.

No Plan is a Plan to Fail

If you have no trade plan, and stick to your plan, your money will be gone faster than you can say, “I lost my money” while looking in the mirror at yourself. When I say trade plan, I mean a minimum of knowing what your entry price, stop-loss price, and take profit targets are before you enter the trade. If you’re investing for the long-term, at least knowing your entry and stop-loss price is vital. New traders most of the time don’t have a plan. So after many losses, either the new trader learns how to have a trading plan, or they have someone manage their money for them, or stay out of the market all together.

Small Losses and Big Wins

If you can learn how to accept small losses and breakeven trades losing small amounts which is two thirds of the time, and winning big the other one third of the time, you’ll be a winner in the markets long-term. There’s ways to do that. Basically, one third of the time, you’ll be making breakeven trades, another one third of the time, you’ll be taking small stop-loss trades, and the other one third of the time, and you’ll be managing and taking profit from a winning trades. The idea is when you have a winning trade, is to manage that winner trade for all its worth, and not taking profits too early which new traders will do have taking many losses before the winning trade hits. These are long-term averages in the trading business. So, it’s about keeping your losses small, and letting your winners run to be a successful investor trader in the long-term.

Trade Plan Success

Now you should be better understanding why a trading plan is an absolute must have to succeed in trading and investing. All successful traders have a plan, and the unsuccessful ones are broke and blown out of the markets faster than they can count. Most new traders don’t have real reasons for entering trades most of the time. Instead, they trade from their “gut” which is the fastest way to trading bankruptcy I can think of. Imagine that you are planning to loan money to a person for a new business as an investment. Can you see yourself lending money to this person if they had no business plan and said they were going to start their business based on "their gut instinct"? Of course a person would never be able to start a business by relying only on their gut, although many of new investors and traders start trading in exactly this manner.

Drawing Up a Trading Plan is Easy

There are some basic requirements that create a sound, viable, and successful trading plan. The main components of a good trading plan are:

Trading Objective and Goals

What and When to Trade

Money Risk Management.

Low-Risk High-Reward Trade Setups - Trading strategies that puts the probabilities in your favor

Trading Journal Documentation and Analysis of Your Trading Plan Results

Trading Objective and Goals

Define and Write Down Your Trading Objectives

You want to define and write down your trading objectives. Why you trading and what are is your intended end results? Most new traders have unrealistic trading goals in the beginning. For example, a new trader might want their $5,000 account deposit turn into $50,000 in the first year. It’s possible but highly unlikely for a variety of reasons. Unrealistic expectations blow out a lot of new traders before they have the chance to learn, trade, win, lose, optimize and win at the trading game in the long-term. Breaking even in the first year is good enough objective; and many traders do not even do that. A trader making 20 per cent to 30 per cent on their startup investment in the first year is above average.

What and When to Trade

Next, you want to determine the basics of how you’re going to make it to your objectives and goals. What financial instruments of stocks, options, forex or futures are you going to trade? I suggest financial instruments that are the most liquid. S&P500 stocks options, and forex are two that offer maximum liquidity. Now you need to decide how you will trade and how often you will trade. Are you going to be a day-trader, swing-trader, or position-trader and hold positions for a long time? Your daily schedule, duties, and responsibilities will have influence on these things. It’s important to define these basic trading ideas to form consistency in your trading plan.

Money Risk Management is an Absolute Must

In futures and currency trading where the accounts highly leveraged, money management is probably the most important aspect of trading. I would you rather have a fund manager who was is average analyst, but uses perfect money management than the opposite. Even the best analysts will eventually blow out their accounts if they don't manage their risk properly. First, you need to determine how much risk capital you have to fund you account, or how much you can afford to lose. Then you want determine how much you will risk on each trade. Most successful traders I know risk 1 per cent-2 per cent or sometimes a little higher of their account balance on each trade. This may sound very low to the inexperienced trader, but after you blow out your account after risking too much, you will see why 1 per cent-2 per cent is quite enough. It is also important to determine what your minimum risk:reward ratio will be. For example .2:1 This could vary based on your overall trading strategy. Then calculate what your break-even winning percentage is. For instance, if your minimum risk:reward ratio is 2:1, you must win one out of three trades to break even.

Your Special Trading Skills

Along with money management, it is vital to have something special that puts the probabilities in your favor and allows you to win more than you lose in the long run. Without this that makes you money over time, without proper money management, it will only delay the decline of your account over time, either sooner or later. There are a multitude of different trading methods to acquire low-risk high-reward trading results, but it is also very important to find and use one that is compatible with your trading style. The true test of your new trade plans is using it for future trades to show you the flaws in your trade plan execution and strategy.

Keep a Trading Journal

The final step is to keep track of your trading results. A spreadsheet that has the following fields is a simple way to keep track and analyze your trades.

Date

Symbol – Example GBPUSD

Action Taken Buy or Sell

Lots - How many lots you bought and sold

Risk – In money

Profit potential - In money / You need one column for each profit target you have with your trading strategies

Result – Profit or loss in money

Equity – Your account balance after the trades are closed

Notes - To keep track of specific details about each of your trades

The Trading Journal Makes It Easy To Analyze Your Trading Results

The trading journal makes tracking and analyzing results simple. Track your performance in the denominated currency in your trading account because that is true unit of measure, not points or pips for forex. This also makes it easy to chart your account equity. There are a multitude of statistics you can draw from this information that would take too long to here right now. The biggest benefit of tracking your trades like this is that you can look at the big picture to see where you are in the long-term, while continuing to optimize your trade plans. If you don't write down your trading results information, you will give more weight to your past recent trades and have a hard time remembering the rest which you can learn and optimize your trade plans from. The spreadsheet will allow you to show problems with your trade plans, your overall trading plan and your trading strategies so you can turn them from losers to winners next time.

The Basic Trade Plan for Your Trading Success

This is the basic beginning to having a successful trading plans profit for you in the long run. Pro-traders apply even more detailed information which help them prevent mistakes and encourage good trading habits. Optimize and expand your trading from this basic trade plan development, and you’ll be well on your way developing a successful trading plan and becoming a successful trader in the markets in the long-term.

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