As you can probably imagine, trading strategies vary according to the individual trader. Despite the differences, each trading plan should display clearly defined rules of engagement for both entry and exit signals.
A setup is essentially a repetitive ‘pattern’ that provides a high-probability signal to trade the market. Whilst we recommend noting each rule in detail, we would encourage a simplistic approach. The last thing you want to be doing is sifting through long-winded notes before entering a trade.
Having an ‘edge/pattern’ that has been fully back tested will greatly enhance your odds of success in the live markets, assuming you have the discipline to follow the setup’s rules!
It is also quite common for traders to have more than one method in play. Although having alternative methods has its benefits, we would strongly recommend newer traders to focus on just one method to begin with, before looking into additional strategies. Remember, one can do incredibly well in this business mastering just one method.
At some point in your trading plan you’ll have to decide which markets to trade. Ideally, these should be the instruments you back tested your strategies on. It is also advisable to focus on only one or two markets, such as, currencies and commodities. This will help avoid overtrading.
If you’re plan involves trading breakouts, being active during the London/US sessions may be the best path to take as this is the time we typically see liquidity come into the markets. On the other side of the coin, a range trader may want to look at trading during times when liquidity is usually lower, such as the Asian session.
We know trading offers one freedom; this is one of the perks! This freedom can, however, be detrimental and lead to one treating trading as hobby, which is a HUGE mistake. Our advice is to simply note times when you are required to be at the desk, and stick to it. This might only be an hour a day for some! The idea behind this is to help stop overtrading and to merge your trading business into everyday life. The last thing you want to be doing is trading because you’re bored!
The strategy, along with your allotted trading times and market selection are all crucial elements that have an important role to play in one’s trading plan. Failing to respect these rules will make trading a very difficult endeavour.
The next section, our final part in this series, will touch on goals/objectives and also round off some of the benefits that come with having a trading plan.