Almost every trading educator talks about the importance of having a trading plan when trading the Forex markets.
Most of these plans revolve around having a strategy that you will use to find and manage trades and then following this mechanically with no deviation.
The whole point of this website is to offer retail traders the chance to see Forex trading from the professional perspective. And pretty much every lesson or concept you have ever been taught will have an alternative view from the professional trading floors of the city.
The trade plan is one such lesson and there are of course significant differences between what you are taught by a retail educator and what you would be taught as a junior trader inside a professional firm.
The main difference is that professionals do not wrap themselves up in a strategy or system to mechanically follow.
When a retail trader thinks of ‘system’ they think of a method that tells them when to buy or sell, where to put their stop loss and when to take profits. There is a popular teaching that the more you can follow you system without thinking, the better trader you will become.
They go as far as to say that it is by not trading like a robot which causes most retail traders to lose money.
This is only half true and is based on one fundamental misunderstanding.
What it means to trade mechanically
This concept originated from trading psychology coaches who go into banks and hedge funds to help their traders stay focused and profitable.
They train traders to tap into their inner game and find their ‘zone’ from which to trade from. This ‘zone’ is a place that allows you to apply your skills that you have spent years acquiring without thinking about how to do it.
For example most people could probably make themselves a coffee while talking on the phone. This action of making a coffee is so ingrained and has been performed so many times that doing it requires no thought. Despite this automatic approach you still end up with a perfect cup of coffee every time.
Making coffee is a simple skill and trading is much more complicated but the principle is the same.
When you are a successful trader you will not think about how to do it in the same way as you do not think about how to make a coffee. And just in the same way as with making coffee the result will be exactly what you want to achieve, which is a consistent income from trading.
It is this process that psychology coaches are referring to when they emphasise the importance of ‘trading mechanically’ or following your system religiously every time.
They do not mean that you should abandon thought and simply buy some strategy off the internet that does all the thinking for you. But rather, to develop the correct skills in order to trade profitably and then find a way to apply them, without thinking, every day.
The birth of confusion
The reason that this concept of a ‘trade plan’ being some magical system that you just follow every day came into existence was due to a combination of two things.
Firstly, retail educators, which have never actually made their sole living from trading the markets, misunderstanding what it means to ‘trade mechanically’. Simply because they have never experienced and applied this process themselves.
You can only understand this when you have genuinely been a trader as your main occupation.
Secondly, the desire to make their products extremely retail friendly by making them simple and easy to follow. Trying to explain to a retail trader about reaching their ‘zone’ and how complex psychological nuances are the key to their long term success is, quite frankly, boring to the average man on the street that just wants to make money from the internet.
And boring, complicated products are harder to sell.
So instead, they take the concept and then dumb it down to a ‘system’ that people can very easily understand, and market it to the masses.
What is a professional trade plan?
The funny thing is that a professional trade plan, as given to junior traders all over the world, is not actually that complicated if you have been there and understand the process.
The plan definitely takes into consideration the massive importance of psychology but it by no means focuses on that specifically.
For starters, it first of all ensures that the trader thoroughly understands the concepts needed to find goo trade opportunities in the Forex markets. (This is of course the fundamentals)
Then it stipulates that the trader must practice those skills over and over in a real, live market environment. (This can only be done by placing trades and being engaged in the market)
Once these habits are installed, the next stage is for the junior traders to follow a mentor. The mentor is usually an experienced trader that is already generating the firm a profit on his book.
The purpose of this relationship is to allow the junior trader to see how the mentor acts and views different market situations. He will be encouraged to ask questions until everything is clear and understood.
Finally, the junior trader will work on building on the success that they start getting.
‘Success’ is measured in steps. No junior trader walks into the city and starts earning $1 million a year from day one.
Instead, the first step is to build the mind set of being a trader. In a firm, traders do not sit around all day ‘back testing’ strategies or surfing the net for the hottest Forex trading robot. They already know how to trade. They know where the opportunities are. They know how to try and capture them.
When they have this mind set, losses and drawdowns are not attributed to bad strategies or the need for a better one. Instead a trader will know that such losing times are purely down to psychology and some basic mistake they made, involving greed, fear or a combination of both.
They take the hit, realise their mistake and then carry on. No new strategies, back testing or clever systems. Just the same basic principles that professional traders have been using for decades.
Once they get to this point, they then focus on the income part. To be a successful trader at a firm you need to make a consistent income.
This is done by setting targets and following them through until those targets are hit.
For example, most traders will start by thinking of an amount that they feel totally comfortable losing each day. They then set a simple target related to that figure for their daily profit.
Then they will set their risk parameters so that they can trade away without worrying about hitting their maximum loss too soon.
And they then chip away building these figures up and up as their trading improves from their learning experience.
For example, you might decide that losing $10 per day is the maximum amount you can lose without it ruining the rest of your day and impacting the other areas of your life. So with that figure in mind you might set a target of $20 profit.
You then trade away until you have 3-5 winning days during the period of a week. When you hit this you then try and increase your maximum daily loss level, and your target with it.
Bear in mind that junior traders are not taught to focus on the profit target, because this would be limiting what they can make in a day, which is counter intuitive. The target is there but the more they make the better.
On the other hand, the loss definitely should be limited and adhered to at all costs, because this is where the account, and the trading psychology can be destroyed by losses larger than one can handle.
At any point you feel uncomfortable with the amount lost during a day, you know that you have risked too much and need to come back down to a lower level.
Every trader is different and some people just cannot handle trading large amounts. This does not mean that they are a bad trader, just that they have other psychological issues holding them back.
In this case it is far better to accept this and work on it, while making a few hundred dollars per month extra income, than to pretend it doesn’t exist and blow your account trying to double it immediately.
By making slow methodical process in this way, you will see signs of improvement and the extra income you earn will grow in the same way that your body changes, almost without you realising it, when you start working out regularly (Or eating a bad diet and gaining weight!)
Create your trade plan now
If you have been trying to build trade plans based on the ever changing conveyor belt of ‘systems’ then it’s highly likely you have never really found successes or progressed much beyond your peak over the long run.
If you are in this situation, I strongly recommend that you try a different approach based on that used by professional traders in prop firms all over the world.
The concept is simple…
Acquire the right skills (Not just staring at charts trying to guess which way the price will go).
Practice those skills in the real life market.
Set targets and slowly attempt to increase them gradually as your results improve over time.
This is obviously something that will take discipline, but if you can follow this then I’d love to hear how you get on in the comments below!
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