Components of a complete trade plan
Now that the different trading approaches have been discussed, it’s time to delve into the details of a complete and solid trade plan. After all, it’s not enough to know when to enter and exit trades, but it is also crucial to lay down clear rules that must be followed.
Of course these rules are not set in stone and may still be open for revision. However, you must be able to exercise enough discipline and patience to test out your trading system for a few weeks or months in order to have enough data to help you figure out if any adjustments need to be made. It is not enough to have just one or two losing trades before completely overhauling your entire approach!
To begin with, you must set the conditions for a valid trade setup based on your trading style. What requirements must be satisfied for you to take a long or short trade setup? Is your trade approach based on longer-term trends or short-term price moves? Are there any technical indicators that could confirm these signals? It is important to be specific with these conditions, as they will act as the framework for your system.
After identifying what would make a trade setup valid, you need to figure out the details for trade entries. Do you open the trade on a break above the previous highs or lows? Will you be using Fibonacci retracement levels in line with moving average or other kinds of inflection points? Will you be setting long or short orders exactly on major or minor psychological levels only?
Now that you’ve determined the entry points, it’s time to identify when you should lock in profits or at which points your trade idea will be invalidated. After all, trends or price moves do not last forever and there’s always the chance that a trade idea will turn out to be wrong. In these cases, it is important to have a clear set of rules for closing trades.
Some traders base their exit signals similar to their entry points. For instance, when Fibonacci retracement is used to identify trade entries, Fibonacci extension levels can be used as exit points. Other focus on major or minor psychological levels, which act as inflection points for most yen pairs. Meanwhile, technical traders can also employ a set of indicators to confirm if it’s time to exit a trade. Setting hard numbers for stop losses and profit targets can also be an option, but bear in mind that these must be appropriate to the time frame you are using.
Above all, the risk management component must be part and parcel of every complete trade plan. Based on your risk profile, you should be able to stick to a certain amount of risk per trade or per day. You can adjust these based on your confidence in a trade setup, but beginner traders are often recommended to stick to a pre-determined risk percentage of the account per trade.
At the end of the day, don’t forget to keep track of your trade system results using a trade journal so that you can identify potential problem areas or points to improve on.
Next Article: Factors to consider when constructing a trade plan