Developing a Trading Plan

If your e-mail inbox is anything like mine, you probably get inundated with random penny-stock tips or the next great Chinese stock initial public offering (IPO).Those are about the only times you’re going to get a message telling you how to trade. The rest of the time you're going to be on your own. But isn't that what speculative trading is all about, anyway?

Don't get me wrong, I’m not trying to scare you off. I’m just trying to make it clear that you're the only one who knows your risk appetite and your own trading style. And very likely, you may not have even settled on a trading style yet.

Finding your trading style

Before you can develop a trading plan, settling on a trading style is essential. Different trading styles generally call for variations on trading plans, though there are plenty of overarching trading rules that apply to all styles.

What do I mean by a trading style? Basically it boils down to how you approach currency trading in terms of:-

• Trade time frame: How long will you hold a position? Are you looking at short-term trade opportunities (day trading), trying to capture more significant shifts in currency prices over days or weeks, or something in between?
• Currency pair selection: Are you interested in trading in all the different currency pairs, or are you inclined to specialize in only one or two?
• Trade rationale: Are you fundamentally or technically inclined? Are you considering creating a systematic trading model? Are you a trend follower or a breakout trader?
• Risk appetite: How much are you prepared to risk and what are your return expectations? 

I don't expect you to have answers to any or all of those questions, and that's exactly the point. But I hope you'll be spend some time to think about what trading style you’d like to pursue. Feel free to experiment with different styles and strategies  that’s what practice accounts, or demo accounts, are for. 

At the end of the day, though, zeroing in on a trading style that you feel comfortable with and that you can pursue on a consistent basis helps. Your own individual circumstances (including work, family, finances, temperament, and discipline) will be the key variables, and you're the only one who knows what they are.

Planning the trade

Whatever trading style you ultimately choose to follow, you won’t get very far if you don’t establish a concrete trading plan and stick to it. Trading plans are what keep small bad trades from becoming big bad trades and what can turn small winners into bigger winners. More than anything, though, they’re your road map, helping you to navigate the market after the adrenaline and emotions start pumping, no matter what the market throws your way.

I’m not telling you that currency trading is any easier than any other financial market speculation. But I can tell you that trading with a plan will greatly improve your chances of being successful in the forex market over time. Most important, I want to caution you that trading without a plan is a surefire recipe for disaster. You may survive a few close calls, but a day of reckoning comes for any trader without a plan it’s just what happens in markets.

The starting point of any trading plan is to identify a trading opportunity. No one is going to give you a call or shoot you an e-mail telling you what and when to trade. You have to devote the effort and gray cells to spotting viable trading opportunities yourself.

On my post in future, I will try to share with you my own observations on how the forex market behaves in many different respects. I think there are plenty of kernels for spotting trade opportunities in those observations. Above all, be patient and wait for the market to show its hand, which it always does, one way or the other.