Developing your first trading plan

Before we go further, it is important to understand a few basic principles.  In the beginning you will develop a set of very rigid trading rules.  This is important and it's like anything else we learn, we must drill on the fundamentals.  Without it we have no structure and it will be difficult to see or measure results.

You must understand the actual limitations of providing this structure and what it will present on your actual trading results in a live market situation.  The core set of rules are such as to help you absorb and memorize a set of actions so that you could repeat them in a live trade and eventually duplicating them without much thought process involved other than the hard-core/pure analysis of the trade.

Each trade is different and in order to succeed you must allow for flexibility in your trading plan but in the beginning stick to your trading plan.  It is important to understand this concept because it is the only way you can look back and measure your results and identify what needs to be changed if it is not as successful as you want the system to be.

There are many trading strategies available on the Internet.  Some work quite well and others will never work because of who developed them.
Let's take the ones that work for example.

Let's say we have a very successful trader who shares his trading strategy on a forum for free.  He wants nothing in return but simply wants to share his ideas because he comes from the understanding of what it takes to succeed and how hard it was in the beginning.

Someone comes along who was struggling with their trading and begins reading about this trading system that is available for free on the forum.

Immediately without having an open mind is easy to knock holes in a trading system that could actually work for someone else.  The key to remember is if you're going to use a trading system that is developed by someone else, in order for you to get the exact same results you must use a strategy in the exact same manner and not change anything.  Changing the slightest detail will change the results.

It's also important to get a good understanding of how and why this trader came about developing this successful trading system.  The reason this is important to understand his way of thinking is that his goals and expectations of the trade may be different from what you expect to achieve.  You must line up your expectations and your goals accordingly.

Now let's say that you understand some of the principles outlined in his trading system so you decide to use this as a starting point.

I would begin by understanding the limitations you have with time.  
Specifically what trading hours or sessions will you operate?  
Normally is preferred to trade when price is most active during one or two of the busiest trading sessions.

How will you trade when the market opens?  
Do you look for opportunities immediately at the opening bell?  
Or do you prefer to wait patiently until some sort of trend takes place or when it becomes obvious that price will remain inside a consolidation?

Are you comfortable with risking 50, 60 or even 80 pips on a trade?
Is it important to you that you risk no more than 30, 40 or 50 pips?  
And perhaps even less?

Once you've determined your risk tolerance in regards to the number of pips you are willing to lose on a trade, you must identify the opportunities that will support this type of stop loss.  For example if you seek to use a very small stop loss then it is commonly suggested to use a smaller timeframe such as a five-minute or 15 minute chart.  If you are comfortable with risking more on a trade but have a limited amount of time to trade each day and cannot sit in front of the computer then you could perhaps use the one hour, four hour, or daily chart.

Now what type of trading environment do you prefer?
Is it easy for you to see and confirm consolidation?
Or is it easier for you to trade when price breaks out of consolidation and begins a trend?  

Each one of us likes or prefers to see things in a certain way.  Tailor you're trading strategy according to what you like, not what others are doing.  Just use their information as an outline.


Let's start with trading inside of consolidation.
Often times the best trade inside of consolidation are to trade when price reaches the high or the low of that consolidation range.  This would obviously result in some type of reversal or move away from the high or low.  This means we could look for a couple of different candle patterns which would give us a signal.  Candle patterns such as bullish or bearish engulfing candles, evening Star or Morning Star patterns.

Since you have already determined what size of stop you are willing to use on a trade, you can now move forward to determine what timeframe to use.  For example if you are looking to use only a 20 or 25 pip stop loss then I would suggest a five-minute or 15 minute chart, I personally use a strategy similar to this using only a 25 pip stop on a 30 minute chart.

Now take a block of time, several weeks looking at the timeframe you have selected and identify through back testing the consolidation ranges that appear obvious to you.

Notice if you see any repeating patterns, begin with the candle patterns and price first.  Study what you see in the price pane window only, in the beginning.  Do not confuse yourself with an indicator yet.

If you choose to trade inside of consolidation, it is important that you master consolidation and understand how to interpret the different highs and lows in a range bound market.  Consolidation can be a very difficult trading opportunity for many to see.  There are numerous spike highs and spike lows in price which can skew the shape of consolidation and not allow for a clear horizontal support or resistance.

So at this point you understand that you need to study and master consolidation if that is the trading opportunity you prefer.  Now again notice how often your candle pattern/trade signal develops.  Notice if there are changes from opportunity to opportunity in the shape of the pattern itself.  Begin calculating where you would actually enter the trade and notice the pullbacks which would test your stop loss placement.
Does your stop loss level hold?

If you find that using the stop loss level you have selected continues to be hit during your back testing, perhaps switch to a smaller timeframe until you find the right one that suits you.

If this timeframe is sufficient and your trades with the stop loss placement hold, it is time to add an indicator.

For the sake of time I will not review which indicators are best if that is even a possibility, nor will we discuss mistakes in selecting indicators.  For now let's just start off with the indicator you may be most familiar with.

As you add your indicator to the charts go back to the location each trade was signaled and notice the reading in the indicator.  
Does it support your trade and would it help you in confirming your entry and the direction?.

(tip to keep in mind is that there are indicators that will help you with overbought or oversold readings inside of consolidation and it may be best to select one of these since other indicators support signals and a trending environment.)

You now have a basic outline for a trading system.  The next step is to write down in detail exactly when you decide to get into the trade and what needs to happen in order for the trade to be valid.

Now begin to use your trading plan forward in a live market environment.  
Notice if it holds up!
How does it work when there are news releases?

If the trading system appears to be a robust strategy that you feel could produce the profit you are looking for, it's now time to drill on the rules of your trading strategy.  Your next challenge will be to follow your trading plan in its entirety and not deviate from it at all.  Changing anything at this point will change the outcome and you will not have accurate data to analyze.

Commit to trading your plan at least a few weeks and preferably a couple of months with the system.  Obviously if you're not seeing any results from the beginning and it continues to lose you need to ask yourself, are you following the trading plan or changing things yourself at every opportunity?  
Or is the system simply no good?


In the beginning I would recommend developing a forex trading strategy that is technical in nature and does not depend on economic data.

As you develop your trading system and your confidence in it, you can apply other resources to use his confirmation and to measure trader sentiment and trend direction.

Read more: http://www.articlesbase.com/currency-trading-articles/developing-your-first-trading-plan-3597065.html#ixzz14JzikR4c                                                                                                             By:Forex Arthur