Planning Your Trades

1 – Keeping a Trade Diary

We have a tendency to remember our profitable trades and dismiss our failures. This is part of human psychology and is perfectly understandable. It helps us deal with the ups and downs of everyday life.

However, this isn’t a healthy approach to trading. In order to learn and improve traders must not only acknowledge where they made mistakes when things go wrong, but study them to see how they can put things right in future.

This is why keeping a trading diary is so important. This should include details of the opening trade, accompanying limits, stop losses and the initial margin requirement. It’s vitally important to be honest and accurate, especially if you break your trading rules by moving your stop for instance. And don’t just say: “I know where I went wrong: this trade went wrong because I moved my stop,” make sure you act on the information and don’t do it again.

2 – Money Management

Decide how much risk capital you have. That is, money you can afford to lose without changing your lifestyle. Then, divide this up into smaller tranches. Ideally this should be into 100 equal tranches of 1% each. This would mean that you have plenty of opportunities to trade even if you have a string of losers. However, some traders are happy to divide their risk capital up into 20 tranches with 5% in each. You won’t be able to make the same number of trades, but this could open up the different markets you could deal on.

3 – Risk Management

This takes into account the money that you’ve put aside for each trade. But it then introduces the practicality of employing these funds bearing in mind the distance between your opening level and your stop loss. The simple rule of thumb is that if the potential loss on a trade (that is, in its most basic but incomplete form the distance between the opening level and the stop-loss multiplied by your stake) is greater than your risk capital per trade, then don’t open the position. Wait for another opportunity which falls within your risk parameters.

4 – Choosing your Entry Level

Of course, you won’t know what your potential risk is until you’ve identified the optimal opening price for your trade. You do this with reference to technical analysis which can help you identify significant trading levels. Typically, there are price levels or areas which have previously acted as support and/or resistance. These can often be good levels at which to open a new trade. Of course, there’s no guarantee that just because something worked before that it will work in the future, but it does increase the probability. Technical analysis can also help to identify sensible levels for take-profit limits and protective stop-losses

5 – Choosing your stop level

Technical analysis should also be employed to help identify sensible stop-loss levels. Quite often, a falling market will bounce off an obvious area of support. Similarly, a rising market will often struggle to break above a significant area of resistance. Consequently, it’s very important to study charts and identify areas of support and resistance. These can then be used to initiate a new trade and also help in deciding where to place a stop-loss.

When selecting a stop it’s very important not to place it within a price band of support or resistance. It’s also important to avoid placing your stop at or near significant numbers, such as attractive round numbers like 200 or 1,000 for instance.

This is because these all become targets for other traders and are more likely to be hit. Instead, make sure you place a sell-stop below significant support and a buy-stop above significant resistance. You will risk losing a bit more but hopefully there will be less chance of your stop being hit by opportunistic traders.

6 – Closing your trades

As highlighted earlier, before you open a trade you should have a trading plan. That plan should include a price target where you would be happy to close your trade and book a profit. This price target will have a number of features.

Firstly, it should be realistic given a particular time frame. In other words, does the market have a decent probability of hitting your closing level in a reasonable period of time?

Then, how does your closing level marry up with your risk/reward ratio? Are you happy to risk £100 to make £100 or you aiming for something higher? Also, what are the charts saying? Does the market have to break above significant resistance or below significant support to hit your price target?

If so, it may be worth considering being less ambitious with your price target, unless of course you’re explicitly anticipating an unexpectedly powerful market move.

  • BrokerEUR/USD
    Core Spreads 0.6pips (variable) margin: 3.33%
    FX Pro 0.91pips. (variable) margin: 3.33%
  • Back to top