07. Strategy & Trading Plan

Reading this page: 10-15 minutes.
Time planning your strategy: A few important hours invested in protecting your sanity.

We can give you some fantastic indicators to show you the underlying bias of the markets and its turning points – but this alone is not enough to make you profitable.

There is still an element of interpretation required  – yes you have to use your good old grey matter to learn and interpret what works for you in the markets you are trading. This is why we suggest you set up your Trading Log Analysis asap.

This is where it gets tricky because your brain will want to keep repeating things that bring you pleasure (making money, being right), and avoid the things that cause you pain (losing money, being wrong).

This little psychological side-effect of trading can make the most disciplined and otherwise sensible people do all sorts of things they don’t expect.

Hence the old, and often underestimated adages; “failing to plan is planning to fail” and “the only thing you can control is yourself”…

So here, we are going to give you some very important key points to help you form your trading plan and form a strategy to suit the amount of available time you want to spend trading or actively managing your investments using our MetaTrader indicators and setups.

Make a trading plan

If you haven’t already, it is time to review the lessons on Trading Plans on Baby Pips

This is your classic flow-diagram – A, B and C are your price-action indicators, and you don’t really need more than 3;

  • If A = true, and B = true, and C = true, then you can place your trade.
  • If any of A, or B, or B = false, then you must sit on your hands and stay out of the market.
  • Lastly if you are in a trade then if A = false, and B = false and C = false, you will want to exit early or reverse your trade.

You can get lots of free and cheap software online for making flow-diagrams but you can just as easily do it in Microsoft Word, either graphically or just a page of text and bullet points.

Ideally a good trading plan should be simple, clear and concise enough to fit on a single sheet of paper to keep on your desk or wall.

Forming a strategy

There is a very good reason why we don’t give exact trading criteria – because every market and instrument is different.

Firstly, you need to do is apply your Indicators, to the markets and instruments that you are trading. Then you need to scroll back as far as the historical data will allow and look what happens each time your indicators agree and record what happens in a spreadsheet.

Then you need to decide on the strongest 3 indicators to give yourself a positive expectancy and then go over the historical data again, bar by bar, with a strategy for using your indicators and profit and stop loss levels to see how you would have performed over many trades.

We actually do a very similar thing using computers and automated trading algorithms but that is where a varied interpretation of the markets is better for everyone to avoid any one system being over-traded and ultimately faded by the professionals when they know what hundreds of people will be doing at exact points in time.

So, even though we will all come up with similar strategy ideas using the same indicators, the fuzzy nature of the way we trade with slight variations will prevent unnecessary attention being drawn to our stop losses, which are ultimately what the bigger players are hunting for, to remove money from the markets for their profits.

How to enter trades

Firstly, make sure you’re comfortable with the Types of Orders and other bits of Trading Lingo on Baby Pips

Again, it is time for a bold statement that we believe, from experience, should help to vastly improve your edge;

  • Do NOT place Market Orders until a candle or bar has actually closed and possibly two – you’re not as fast or impassionate as a computer so this erodes your edge.
  • Do NOT place Stop Orders to enter the market on a breakout because again you are opening a trade before a candle or bar closes – this means you have missed a portion of the move that you are hoping to profit from, or you do not have any sustained confirmation whether the move will continue – again eroding your probability edge.
  • This leaves Limit Orders – these you are aiming to place at a level that you believe is strong enough to trigger a reversal of some kind, this way you are getting the optimal value price for your trade and should have more room to play with as you manage your trade.

Where to place your profit target levels

It might sound obvious, but you really want your profit target levels to get hit much more often than your stop losses to profit in the long term. So, who do we do this?…

  • Place your Profit Target a few pips inside the next nearest strong support or resistance level – remembering to add your broker spread to your profit targets on sell orders.
  • If your trade goes against you, then you might want to move your profit target to just inside the level you entered the trade – to hopefully get out for a minimal loss before price hits your stop loss level and crystallises your loss.

Where to place your stop loss level

This is the important for two reasons;

  1. It is the level at which you are definitely wrong about which direction the market is going next, and
  2. It dictates the number of pips you risk and need to use to calculate your position size or number of lots traded to work this out in monetary terms as a percentage of your account – ideally 1-2% on larger accounts and up to 5% for smaller accounts if you are aiming for more capital growth but with bigger swings in your equity on losses.

Back to Baby Pips school lessons on Risk and Position Size if you’re not completely sure about this!

So, once you’re confident with these principles, here’s our suggestion;

  • Place your Stop Loss a few pips outside either the next strong support or resistance level, or ideally the one after that to give yourself a second chance to get out for a minimal loss if a trade goes against you.
  • Do not move your stop to break-even before your profit target is hit – every time you adjust your trade, think or it as a new trade, would you enter a trade with the new stop and target? If not, you’re better off closing the trade early in profit.

How to manage your trades

Whatever your timeframe; Monthly, Weekly, Daily, Hourly, 5 minutes, you should re-assess your trade on the close of each bar on that timeframe.

Every time you check the close of a new bar and decide whether to adjust your trade or even close it, you are essentially making a new trade decision from within a trade. Remember, doing nothing is still a choice.

Whilst in a trade, you are looking to reassess each candle close to see the reverse of your entry indicators for confirmation that it is time to exit or allow the trade to continue to run.

When you’re not in a trade, you are looking for the optimal entry – but then, and perhaps most importantly, what you might do if the trade moves against you to tighten your targets according to the new information being presented during a trade.

Trading notes

Make a note in the comments on MetaTrader or your Trading Log spreadsheet on what made you enter and exit each trade.

These notes will form an important part of your ongoing refinement of your trading, helping you to become much choosier as to which trades you take and which you pass on.

Remember, showing not to trade is choosing to keep you account balance in tact and available for better opportunities that may present themselves in the very near future. There’s nothing worse than taking a guess on a trade, only to see a much better setup materialise and not being able to take it because all of your risk able amount is tied up already.

You can then review these notes on all your winning and losing trades in your history through myFXbook.com or mt4i.com and better understand your trading and how to improve your edge.

Perfect Trades

When you place a perfect trade, and your indicators all line up and give you a really clear confirmation to enter and exit the trade, take a screenshot of the chart and annotate what you did.

Keep a folder on your computer or perhaps print outs of these perfect trades and whenever you look at a new trade, review these model trades and ask yourself if the trade you are about to place is as good. If it is, great, if it isn’t, re-asses and then record what happened to the trade in your log without trading it, this will teach you a lot about foresight and hindsight and help you become a much more professional trader.

Evolving your strategy

Remember, doing all of this yourself is very, very difficult, so before you start risking real money on learning, practice with a demo account and get yourself in some trading rooms and on forums for discussion and support as you progress and refine your strategy.

You should find the sharing of ideas in a private environment with real feedback from fellow traders can be invaluable and will help keep you disciplined and reasoned in your methods.