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Trading Education -  Online Commodity and Futures Trading, A Forex Trading System and Education for the Forex Trader, Commodities Trader, Options and Stock Trader.

Step 3: The Trading Plan

If you don't have a trading system yet, it's time to build one. Even if you already have a system that you purchased from someone else, such as a course or a book, I still feel that adding your own touch to it makes it unique to you and therefore more desirable. Below I will give you a system that works around 70% of the time, but this only applies to entries. The exits depend purely on price and it's behaviour and therefore can not be predicted, even in a general sense. I suggest you try and build your own system but there is nothing wrong with using elements of other's systems and blending them in with your own ideas. You may want to use some of the system explained below, you may want to use all of it, but even then I still feel you should add your own touch.

What will you trade? A simple question. Will you trade Forex, Stocks, Options, Futures etc? You can also answer what time frames you are looking to use.

Our system will be looking at Forex, although it can still be used on other instruments. We will also be using the 4 hourly chart as our main chart, and the 1 hour and 15min from time to time. The currency pairs will be those that offer spreads of 5 or less. EUR/USD, USD/JPY, AUD/USD, GBP/USD, USD/CHF, EUR/JPY, USD/CAD, EUR/GBP, EUR/CHF, AUD/JPY.

How will you prepare and trade your day? This comes down to how you prepare yourself first before you even turn on the computer (such as exercise, meals etc), what you do once you turn on your computer (research, setting up charts etc), what you do after you are in a trade (such as turn off the computer, or monitor your trading etc), and finally, how you record your day's work.

With our system, we have a simple rule. If there is no signal, there is no trading and the computer goes off, until the next day. The majority of signals take time to develop, but the best time to trade them are generally during the London or US sessions. If we get a signal, we then prepare a plan for the trade, and then trade the plan.

What is your risk and money management? Write down the amount of trading capital you have available to trade, and determine your risk. If you have $10,000 in your trading account and you state that the most you'll risk per trade is $200, you ultimately have enough capital to endure 50 losses, before you have to go looking for more money. This is such a simple yet overlooked part of the trading process, it amazes me how many people don't do it. Another method might be to state that you'll only ever risk 2% of your trading capital per trade, and will never have more than 20% of your entire capital in the market at any given time. Either way, you must also look to reassess your risk management as your trading capital changes over time.

We will be using 2 lots per trade. The first lot is to attempt to take profit at a pre-determined target, the second is allowed to run. So depending on our float, we need to ensure that our maximum amount of risk can afford two lots. If it can't then we need to trade mini lots.

What are you going to call your trading system? Give it a name that reflects what the system is about, such as what makes it unique. Uniqueness in a trading system can come from anywhere, such as a combination of indicators, analysis of fundamentals, the time you trade etc.

Our system is called 'The 2S4H System'. This stands for 2 stochastics on a 4 hour chart.

Give a brief description of your system. This is like an introduction to the basics of your system.

Our system is based on plotting two stochastics on the 4 hour chart, one of which is longer than the other. This has the effect of seeing the conditions of two time frames on one chart. When both stochastics reach either overbought or oversold simultaneously, it adds more weight to the condition than if we were looking at the one stochastics reading. This is the signal, and until we see this signal, we do not go any further. However, once we see this signal, we will look to develop a plan based on our own personality, such as aggressive to conservative. We then use a combination of lower time frames, candlestick and chart patterns, stochastics and trend lines. We will attempt to pre-determine our first profit target and if met, will let our second lot run.

How do you set up your charts for trading? This setting can usually be saved within your charting software.

For our system, we first set up the 4 hourly chart with two slow stochastics. The first with a 5,3,3 setting and the second with a 30,3,3 setting (the last digit has less importance than the first two). Any lower charts  will use a stochastics setting of 14,3,3. All over bought and oversold settings will remain 80 and 20.

What other trading tools and indicators will you use? Here you can list additional tools, such as trend lines, pivot points or whatever you use that is dynamic in nature.

Our system will be using trend lines, fibonacci for long term resistance and support points, candlestick formations, stochastics and bollinger bands. The trendlines are mainly used on the 4 hour but can be transposed onto the hourly. For aggressive trading they can be used on the lower charts. The candlestick formations we'll be using as reversal patterns, the stochastics for divergence and the bollinger bands for extremes in price and are mainly used for aggressive trading.

Define your entry rules. List a very comprehensive list of rules. I don't mean complicated, but comprehensive, which means you really need to spend a lot of time backtesting your rules, taking screen shots of examples and giving plenty of notes. Find examples of when your triggers work and when they don't work. Don't be a fool and think you can find a set of rules that work 100% of the time, because you'll be looking for a long time. Finding examples of when they don't work will enable you to gauge if your system has potential by looking at how often your triggers fail and succeed. Then you can look at exit rules to work out how profitable this system can be.

We will be going to another section for this part for two reasons. Firstly it requires more than just this page but secondly and more importantly, unless you have done everything else up until now, and I mean steps 1 & 2, then the rest will be meaningless. Our system works but I can assure you that 70% of the people that I show this system to will not be able to work it and it all comes down to a lack of preparation, planning and self analysis. If you think this is hocus pocus, then I dare you to not do all of the above and make this system work, month in month out. We will be looking at entry rules for both aggressive and conservative traders, and even traders inbetween. It will also enable you to adjust to your time availability.

Define your exit rules. Once again list your rules and be comprehensive. Did you know that most traders don't even have a set of exit rules. This is staggering and it's a perfect reflection of the number of traders who lose money on a consistent basis. I was once told a story by a successful trader who had been teaching for a few years, and had also been sending out alerts. He was conducting a one day seminar and asked the students there if any of them had taken a postion he alerted them to 9 months prior. All of them put up there hands. He then asked how many were still in the trade. None of them put up their hands, which prompted him to ask why as he was still in this trade himself. It became very apparent to him that most people are looking at the money when they are trading and not a set of rules. By not having a set of rules and being disciplined to follow them, it can force you to look at the money and not the process, and hence cut your profits short.

We will also look at a set of rules for our exits to go along with our entry rules which are quite simple.

Analyse your trades. After each trade, you should be recording it in the way of notes and screenshots of all the charts involved. You should also have a check list that will enable you to check off whether you have followed your rules or not. When recording your trades, the list of questions you ask should not be restricted to technical questions. An example would be, when entering the trade, what were your reasons, and your answer will have to do with your trading plan at the time, but your next question should be, how did you feel when making the trade? This is vitally important if part of your self analysis exposed a weakness or reluctance to actually pull the trigger when trading due to low self esteem and confidence. Just the mere fact of writing these things down can do wonders for your self improvement. You should then ask how you felt after the trade was closed if it was a loss, and if it was a profit. All these things should considered if you are to make a succes of trading. When I write down my thoughts before, during and after a trade, I try to maintain a level of humour, as if someone else is going to read it. This is good for me.

For our system, we will have a template for recording the trades, but you need to add your own questions to it (more on this towards the end).

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