Create Your Plan
Section 1: The emotional aspects of your trading plan
The first step to creating your trading plan is to understand your own psychological makeup. If you ask any professional trader about this, they will almost all tell you that understanding your psychological makeup and how you will react to certain situations is one of the greatest keys to being successful. Many inexperienced traders experience what I call the “Psyche Slap” when they start trading real money and they are not ready for the emotions that come along with it. Many times, what they rehearsed over and over in their minds is not what they end up doing. Amateurs experience the highs of euphoria when winning (thinking they are invincible: greed) and the lows of anxiety and depression when losing (regretting everything they have done, questioning every trade: fear).
Professional traders on the other hand seem calm, cool, and collective even when things don’t seem to be going their way. This is called trading in the zone. If you want to trade in the zone you need to learn how you feel when you have a winning trade and when you have a losing trade. Once you know the feeling of each emotion you can deal with it, by overcoming it with what you have written in your trading plan.
Ok, now let’s begin helping you to create your very own trading plan.
1. Why do you want to be a trader?
Remember I told you above that your motivations to trade and become a trader really need to be examined. Is this really the business for you? Can you see yourself as a trader 5-7 years from now? As I have already mentioned trading is not easy. If you actually make it to the elite 5-10% of traders that actually make money it can be very profitable and very rewarding. So you really need to ask yourself, are your talents better used elsewhere? Here is an example from my own trading plan:
I want to be a trader because I enjoy the challenge and I like working from the comfort of my home and being close to my family. My main financial goal as a trader is to generate sufficient annual income of $200,000 in order to support my family and continue to enjoy the lifestyle we have become accustomed to. My second financial goal is to manage $100 million in private assets. These financial goals are important to me because I believe they are part of my purpose in life and they allow me the freedom that I desire. I believe I can achieve these goals because I am diligent in my studies and am able to stay disciplined and follow my rules. I have a good group of mentors and a supportive family that will help me achieve my goals and stand behind what I do. I am sufficiently capitalized.
2. What Kind of Trader are You?
There are really only three types of traders although there can be numerous mixes of the three. I have listed them below:
1. Discretionary Trader. This is a trader who makes all of their decisions based on incoming information that could change on a regular basis. For instance, a discretionary trader may change his entire trade analysis on one piece of news that comes out, and he decides to take profits early. In other words, you make your trading decisions based upon your own discretion.
2. Mechanical Trader. A mechanical trader is a trader who follows a certain set of rules and very rarely deviates from these rules. The Sniper FX system is about 95% mechanical in nature. Therefore, I am a mechanical trader. A mechanical trader however, still has to be at the chart and push the button when it is time to make a decision.
3. Black Box or Systems Trader. A systems trader is a trader who programs their strategy into an automated trading strategy that makes all of the decisions for them. It is very important for a systems trader to have a written trading plan as that will help them quantify their entire strategy on paper and begin to allow them to write the rules for their system.
The Mixes
Within these three categories of traders there are several mixes. For instance, do you propose to be a day trader (all positions closed at end of day), swing trader (positions may last two days to four weeks), position trader (positions on for months). Obviously, you have to weigh some issues before you make this decision. First of all, how much time can you devote to your trading? If you are a day trader you will have to be at your computer for a long period of time and almost every day in order to have long term success. Swing traders have the luxury of checking their charts 1-6 times a day. Position traders may only check their charts once a week.
There is also another mix as to which kind of trader you are. Are you an aggressive, moderate, or conservative risk taker? You may think that you are aggressive, but when you see your account fluctuate by 1-2% in a day you start to get knots in your stomach. This is a very important component to understand about your psychological makeup. Be honest with yourself here and you will add a few years to your life. :-)
There are benefits to each one of these mixes, but which one realistically suits you? Here is my plan:
I am a mechanical trader and a systems trader and I am generally a moderate to moderate-conservative risk taker. This brings me to the conclusions that end of day trading best suits me. I do not like to day trade because I do not like to be glued to my computer screen all day long. My goal is to spend more time with my family and doing what I want to do when I want to do it. This also brings me to the conclusion that I like to program my strategies into automated systems that will allow me even more freedom. I do not try to predict the future with my trading system. Therefore, I seek to be a trend follower more than anything else. My goal is to be on the right side of the move, but if that doesn’t occur I am not bothered because I am consistently following my trading plan, that is proven and profitable.
3. What is your mental state when you sit down to trade?
This is extremely important and something that you need to ask yourself every time you sit down to make a trading decision. You also need to have a plan of action based upon your mental state. If you are tired (to the point where you cannot focus), hung over, sick or in pain, mentally stressed by life’s issues, or otherwise distracted, what will you do? Will you trade or will you take the day off? Here is my plan of action.
I will only make trading decisions when I am well rested, relaxed and not otherwise distracted by outside factors. If I am not in the right state mentally (angry, frustrated, foggy or am feeling any other kind of negative emotion) I will not make a trading decision. If it is possible for me to step back and clear my thoughts and put all of my focus and energy on my trading plan then I will jump back in the game.
I will not trade if I feel the emotion of greed (I have to make money) or the emotion of fear (I have already lost and am trying to regain my losses). This is called rebound trading and I will not do it.
If I am sick, or just plain stressed out I will take the day off, recoup my energy and my focus and then jump back in the game. This is something that I am putting in my trading plan so that I strictly adhere to it. I have already had negative experiences when not following this regimen.
4. Realistically, How Much Money Are You Targeting?
Now let’s discuss the reason that we are all traders; money. We all want to make more money for many different reasons. Hopefully you have listed some of those reasons above already. But you always have to set realistic goals for yourself in this area and they need to be based on solid evidence that your trading system or techniques can actually produce those results (Back testing and forward testing, which we’ll discuss in later lessons). You also need to take into account your starting capital. In other words you may think you can take $10,000 and turn it into $1mm in 12 months. Is this possible? Yes. It has been done before but only by a handful of traders over the last 40 years. Is this a good goal to set? Probably not. If you are staring out with $10,000 earning $50-$100 a day on average would be doing very good. That would put you at around 10-20% a month uncompounded. This is achievable if you have a good system and you adhere to your system. The other question is how much are you willing to risk in order to get the kinds of returns you desire to achieve? Here is an example of a good plan:
My financial goal with my trading business is to make 100% a year on the capital that I have funded. This will give me an annual income of $200,000. I will achieve this without the drawdown of my account exceeding 30%. This will give me an average monthly income of $16,667, an average weekly income of $3,846, and an average daily (trading days) income of $769. My daily percentage target is 0.3%.
Now doesn’t a 0.3% target sound much more achievable and manageable versus a 100% a year target? :-)
Stay tuned for the next lesson on building your trading plan…
To your trading success,
Cecil Robles
Want to use this article in your blog, newsletter or website? You can, as long as you include this complete blurb with it: Trader and CTA Cecil Robles reveals powerful insights like this and more for traders of all types at his website www.4xeducator.com. To learn how to really succeed in your trading business, register for his weekly market newsletter at www.4xeducator.com
Disclaimer
This document was prepared with a spirit of excellence and due diligence. However, the ideas contained within this document may not be suitable for your trading style. Trading is risky business, and while putting together a trading plan is good, it does not guarantee your success, nor will it prevent you from incurring losses. Losing is a part of trading. If you are not prepared to have losses, do not trade. Any losses that are incurred are the sole responsibility of each trader. Under no circumstances will I, 4xeducator.com or any other contributor to “The Most Necessary Document Ever For Traders of All Types” accept any liability for loss.
Tags: Cecil Robles, Forex Trading, Forex Trading Plan, Forex Training, Trading Tips
