Creating Your Forex Trading Plan ~ elite forex trading system
We cannot hope to compete with the professionals if we dont trade like them. The basis of a planned approach is to have a set of well defined trading objectives in terms of your personal trading situation and target profit on a monthly and/or annual basis, the opportunity profile (for each and every currency pair traded), risk management, and account equity. If you dont take the time to learn and understand how these variables can affect your results, then your chances of success will be much lower.
Your Personal Trading Situation
The first step in setting a useful target for tradiug profit is to carefully consider the variables which characterize ones personal trading situation, including the number of currency pairs traded and the volatility of each pair (measured by Average Daily Range (ADR)), personal trading style, times of day available to trade (in relation to important trading session opens and closes), and the total time available each week for trading.
As an example, here is my personal trading profile based on the above criteria:
- Number of pairs traded: 1 (GBP/JPY)
- Volatility (ADR): 250 pips (approximate)
- Personal trading style: Primarily swing trading (100 pip targets)
- Times of day available for trading: 6 hours, 8:30pm - 2:30am PT
- Total time available each week to trade: 30 hours (6 hrs/day, 5 days/week)
In contrast, a target of 500 pips per month might be an unrealistic target for someone who has only, say, 2-4 trading hours per day, twice per week, focusing on scalping on a pair such as EUR/CHF, which has a lower ADR. Therefore, it is necessary for each trader to realistically consider his or her own personal trading situation in order to derive a challenging but achievable target for monthly trading profit.
Opportunity Assessment
An effective method of conducting an opportunity assessment is to look back over an intraday chart for the past 1-6 months. On the chart, highlight the times of day and days of the week when you are generally available to trade. In relation to your trading style, how many setups were apparent on that chart, and how many pips potential did they offer relative to the realistic take-profit levels where you would have exited the trade?
Performing the above assessment with respect to my chosen currency specialization over an annual cycle, I believe the following activity profile (winning trades only) represents an achievable performance target for gross profit:
Risk Management
Obviously, winning trades are only one part of the profit equation. The other part is unprofitable trades, which have to be accounted for in deriving a realistic bottom-line objective. Unless you really and honestly believe there is such thing as a holy grail trading system that generates almost no losses over a long period of time, it is critical that your trading plan specifically allow for losses.
Trading loss can be divided into two components: the average size of stop loss employed, and the frequency of trades being stopped out. If you maintain a record of your trading activity, whether in a demo or live account, it can be useful to simply plug in your actual figures for average stop loss and Win/Loss and assume those performance metrics can be projected into the future.
On the other hand, if you dont know your long-term performance results, it may be safer and more prudent to allow for more conservative targets, at least in terms of Win/Loss. My trading style tends to stress a relatively low, precisely defined stop-loss risk which is employed on each and every trade. This is possible because with the time I have available to trade, I can afford to wait patiently for a well-timed, low-level entry point.
If your trading situation does not allow for this, you may need to consider wider stop losses, which will in turn have some effect on Reward/Risk and position sizing. While my Win/Loss ratio over time tends to exceed 65%, I like to allow for a lower benchmark:, as a way of building in a margin of safety in my trading objectives. Therefore, assuming a more conservative win rate of just 50%, and an average stop loss of 30 pips per trade, the annual activity profile shown in the table above can be translated into the following targets for net trading profit:
So, based on defined targets encompassing my Personal Trading Situation, Opportunity Assessment, and Risk Management, I have a plan which concludes that an annual net trading profit of about 6,800 pips is possible by targeting a 50% Win/Loss ratio, 3: 1 Reward/Risk ratio (100 pips profit, 30 pips loss) and 6-7 trade attempts per month over 11 months of the year. That equates to an average monthly target of 6,840/11 = 622 pips.
With reference to my initial assumption of 500 pips per month, I see that this is an obviously achievable target. To build an even more conservative margin for error into my planning, I defer to the original 500 pip target, which is about 20% lower than the projected activity levels.
Account Equity
Depending on Account Equity, a lot of dollar profit can be generated from 500 pips per month. The table below translates 500 pips per month operating profit into a financial profit in USD (assuming a US dollar trading account and 500 pips realized on a USD quote pair).
As indicated above, with a 30-pip stop and risking 1.5% of account equity on any single trade, 500 pips equates to $2,500 profit for every 10K increment in Equity. This results in an actual leverage utilization of 5: 1, which is apparently much lower than the maximum leverage traditionally offered by many brokers.
Note that the money management benchmarks in the table above are very general that they do not reflect partial lot sizing for levels of account equity between the categories quoted above. In other words, profit-per-trade potential can be further optimized by calculating position size (number of mini lots per order) each and every time a trade is about to be entered, relative to the current actual account size using the 30-pip stop and 1.5% account risk formula illustrated above.
Based on the above, we can see how Account Equity can affect our financial profit, increasing our operating profit (in pips) through leverage. Thus, the question every trader inevitably faces when opening a new account - "how much money should I put in?" - needs to reflect consideration for the maximum amount that could be lost entirely without disrupting household finances, while at the same time addressing the question "how much do I want to make?"
If you want to earn $10,000 per month on 500 pips, for example, the table above indicates that your trading account needs to be funded to the tune of $40,000. If that is not possible, then the target for financial profit (in dollars) will need to be reduced, or the target for operating profit (in pips) will need to be increased (or some combination thereof).
For some traders, the concept of not to target big profits on a small trading account can be a real letdown. However, trading with a slow and steady wins the race attitude may be one of the most important safeguards to prevent you from joining the 95% of traders who blow their entire trading account before they have mastered the markets. You would certainly be much better off building up your trading confidence by building up your account slowly and consistently over time than to have to repeatedly, answering margin call after margin call from your broker not knowing when you might win it all back.
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