ASFX Insights

The ASFX Guide to Building a Detailed and Effective Trading Plan

The financial markets offer an individual unlimited freedom of expression. In the retail trading space there is no one to tell you how to act or how to think. Everything within your trading is within your control, which is unlike almost every other aspect of life. 

The best way to navigate this kind of freedom is to create a trading plan of attack that will provide you with easy-to-follow rules and guidelines that will keep you on track and lead you to consistent profits. From Dr. Van K. Tharp’s Trading Beyond the Matrix, “There are always going to be opportunities as long as you stay in business. Your rules are designed to keep you in business and have you at maximum performance.”

Your trading plan will keep you in the trading game and give you a real chance at becoming a consistently profitable trader. Having a plan will also allow you to remove a lot of the emotion from your trading so that you can trade with a calm and clear mind.

Today we are going to briefly discuss the differences in the trading plan of an advanced trader versus a beginner trader and go over the basic elements you should include in your own plan.

Beginner Versus Advanced Traders

Your trading plan is a living document that will evolve as you evolve as a trader. In the beginning, you may find that your trading plan is considerably long. This is because early in the process you are training your subconscious mind to remember and internalize the patterns that are going to make you money. 

You are building up your pattern recognition and the quickest way is through repetition. Writing a detailed plan and reading it prior to each trading session (or each morning if you are a swing trader) will add additional reps to your daily practice. 

As you advance and gain experience, you will have internalized a lot of the patterns and rituals surrounding your trading and you will be able to remove them from your written plan to make it more efficient.

Now that we understand why you need a trading plan and how it will change over time, we can dig into the elements that make for a great plan.

Elements of a Consistently Profitable Trading Plan

Purpose Statement 

Why do you trade? What goals do you hope to accomplish with your trading? What doors will be opened for you as a result of profitable trading? A way to make this section really powerful is to connect at least one of your personal strengths to your trading. You should also include the consequence of what happens if you do not push yourself to reach your goal of becoming consistently profitable. 

Pro Tip: You aren’t trading for money or freedom from a boss. 

Dig deeper. “Tap in” as we like to say.

Trading Rules

These are a list of rules to adhere to. YOU DO NOT VIOLATE YOUR TRADING RULES. These are more general than the rules for your entry and exit systems and address how you treat your trading.

Pre/Post Trading Routine

The best traders are peak performers and always come to the charts prepared. Each day prior to your trading session you should have a routine that you go through that puts you into a focused mindset so that you can perform optimally during your trading session. On the other end of that, you want to have a  routine that takes you out of the trading mindset and will allow you to focus on the rest of your day. There is nothing worse than letting losses from a trading session have a negative effect on your time off the charts. 

Daily/Weekly Soft Targets and Hard Limits

Soft targets and hard limits are the boundaries by which you can contain your trading. Limits keep you from digging yourself into a hole you can’t climb out of and targets prevent you from overtrading and giving back hard-earned profits. If you are an intraday trader you can set daily, weekly, and monthly targets and limits. If you are a swing trader you should have weekly and monthly targets and limits, as well as quarterly targets and limits if you hold trades for months at a time. Understanding your system and your risk appetite will help you choose realistic targets. Remember though, every month is different and sometimes you will not hit your targets, while other times you will exceed your targets. Be flexible and accept the opportunities that are given to you. Do not allow yourself to force trades to meet your targets. More often than not this will result in losses. 

Building a Watchlist

This section can be omitted if you have internalized how you go about building your watchlist. If not, you should include this in your plan. You should build a watchlist every morning so that you can be ready to act on opportunities that present with the probabilities stacked in your favor. You don’t want to waste your precious time focused on pairs that aren’t going to give you any high probability setups. This is especially important when you are a setup specialist, where you focus on finding ideal conditions across many different pairs. You want to place your attention and energy where it will best serve you. 

Detailed Entry Signals

This is how you will get into the markets. Having your entry rules written down and next to you when you trade will help prevent you from making avoidable mistakes. Some factors you can include are the areas where you will look for trades, where to place your stop loss, and a pre-trade checklist to ensure enough factors of confluence are present for you to take the trade. For newer traders or traders using a new strategy, it is highly advised that you include pictures of your setups. 

Risk Profile

The risk profile of every trade is made up of 2 parts: your grading profile and your trade management. The two parts work together to maximize the profitability of your best setups and to minimize the possible negative effects from your worst setups. 

Grading Profile 

Each one of your setups should have some sort of grading system behind it to help determine the size you put on your trades (your risk). Proper position sizing will help you stay in the game longer and reduce your maximum drawdown. 

A general guideline used by many traders is to risk 1% per high probability trade. However, this is completely personal to each individual trader. I have seen risk profiles ranging from 0.10%  to 3% on any given trade. You should think in terms of percentage instead of dollar amount because percentage is scalable as you increase your account size. 

The grade you choose is based on the probability of the trade working in your favor. Some traders choose not to grade their setups but at the very least, you should know and understand the difference between your valid setups and your high probability setups. 

In ASFX we use a grading system to allow us to put bigger risk on our best trades and to increase our strike rate by not taking less probable (valid) setups. It makes logical sense that as you progress as a trader you would have more confidence and want to put on more risk in your best setups and less size on your valid setups. 

Trade Management 

Trade management is determined by the entry signal and the grade given to the setup. Your trade management should be mechanical to get the best results. Some factors to consider: 

  • When is it appropriate to move my stop loss? 
  • Do I want to take partial profits along the way, or do I hold my trade with full size until my target is reached? 

You should also have rules for when to fully exit a position to prevent your winners turning into losers and to ensure you take profits from your successful trades.

Now you should have an idea of the elements needed to create a solid trading plan, as well as have some ideas on questions to ask yourself to help you build a plan custom to your strategy and personality. 

Below you will find PDF copies of the plans some of our traders use everyday at ASFX. If you want to find out more about the system we use to trade the foreign exchange market click here.

Gwendolyn’s Trading Plan.

Check out this video from Austin where he discusses his Trading Plan!

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