This is the second in a series of three articles covering the very important subject of Preparation for FX Trading. If you missed the first article, you can read it here.
In this article, I will be discussing Trading Business Plans AND Trading Plans and why traders need both to be successful.
A Trading Business Plan is a big picture plan for your trading business. It states how much capital you are going to use, how you are going to allocate that capital, how much you will risk on each trade, how many losing trades in a row you will allow yourself before you take a break, what markets you will trade and what times will you trade etc. This is your ‘big picture’ structure.
A Trading Plan specifically relates to each trade you take. It is a written document that details the price at which you will enter into the trade, where you will place your stop-loss and how many contracts you will trade etc. You should complete a Trading Plan for every trade you take.
Both Plans are equally important. You wouldn’t open a McDonald’s franchise without a Business Plan that documented how to operate the business, nor would you employ someone to work on the cash register without providing them with a clear procedure for entering orders into the system for every transaction. You could have a great Business Plan but if your employees are not well trained and/or not following a system, the business could (and usually would) suffer. Similarly, you might have excellent, well trained employees but if you have no clear, well thought-out Business Plan, the business will generally lose direction and suffer.
I have worked in organisations with both these problems and trust me, they just don’t last the distance.
If you want a long and successful FX Trading career, you would do well to plan properly before you begin. We all know the saying “Fail to plan and you plan to fail” but I wonder how many take it seriously?
If you are looking to enter the profession of FX Trading, or if you are already trading without one or both of these plans, now is the time to put your plans together, using the points below as a guide. This is by no means an exhaustive list but it should be enough to get you thinking.
Trading Business Plan
For a Trading Business Plan, a good place to start is to consider the questions who, what, where, when, how and why?
Who? Who is going to be running this business? In most cases this will be you – are you qualified to be running this business? If not, what steps do you need to take to get yourself sufficiently qualified? Will you work alone or will you work with another trader? If you have a trading partner, what are their responsibilities and what are yours? Will you have a boss or a mentor to keep you accountable?
What? What markets will you trade? Will you specialise in a few specific markets, like the major currency pairs, or will you look at all the currency crosses? Will you specialise in just one or two pairs, e.g. the Australian Dollar/US Dollar and/or the Euro/US Dollar pairs?
Where? Where will you set up your trading office? What furniture/equipment do you need? The dream of taking a laptop and travelling the world as an FX Trader needs to be earned – it is not a God-given right. You need an appropriate workspace. This doesn’t mean you need five desks and twenty computer screens with flashing prices. A simple desktop or laptop computer with a printer will suffice. I also use a series of whiteboards to display my hand charts and keep track of important dates and prices to watch.
When? When are you going to trade? Most businesses have ‘core hours’, meaning that while an employee has some flexibility in their 40-hour work week, they may need to be in the office from say, 10am to 2pm every day, regardless. When will you analyse the market? When will you place trades? The FX markets run for 24 hours, but the end of one day and the start of the next is generally regarded as an hour after the close of the US stock market. Currently, the US stock market closes at 6am (AEST), so the FX market close/re-open is 7am. Note that there is no official close, it is just a time-stamp, registering the price at 7am and then starting a new daily price bar. (Note: this time changes to 9am AEDT during Summer due to Daylight Saving.)
How? How will you trade? What methodologies will you use? Are you an Elliott Wave Trader or a Gann Trader? Do you look for long-term moves in the markets or are you a day-trader? Maybe you will focus on Double Top and Double Bottom patterns. You need to be clear on this. Your trading will struggle if you try to take on too many different strategies and types of trades.
Why? Finally, why are you trading? Why, really? Nearly everyone says they are trading “for the money” but there needs to be more to it than that. Perhaps you are trading to generate a few thousand dollars extra each month. Perhaps you are trading to build to a specific dollar amount to retire. Perhaps you want to buy a house from your trading profits, as David Bowden did from a single trade in 1988. Whatever your goals, they should be clear and specific.
As I mentioned above, this is a starting point to stimulate your thinking. Your Trading Business Plan should be reviewed from time-to-time, perhaps at the end of every quarter or at most, every year.
A Trading Plan can be as simple as a few lines or run to many pages. I would suggest a maximum of one page, so that it is all in front of you when you are ready to take a trade. You don’t want to be fumbling through a 12-page document while the market runs off without you!
You need to be clear on the techniques you will and WILL NOT follow in your analysis. For example, I have seen traders who use Elliott Wave when it backs up their viewpoint but ignore it when it gives a conflicting signal – they only use it when it is convenient.
Whatever your methodology, it must be well-tested. Your strategy should be tested until there are no further questions to answer. If you are asking “how does my strategy perform in sideways markets?” or “how did this strategy fare during the GFC?” you have not fully tested it.
I trade using the methods of W.D. Gann, as taught by David Bowden, the founder of Safety in the Market. I am a swing trader and my goal (as was David’s) is to take 50% out of a major swing chart move ‘with-the-trend’.
You should not be trading unless you are completely clear about your method of trading!
In the Smarter Starter Pack manual, David Bowden says that a Trading Plan needs to cover a minimum of four key points:
- Where you will enter a market
- Where you will exit a market with a profit (a profit target)
- Where you will exit a market with a loss (a stop-loss)
- Money Management (how much you will risk on the trade)
If you have read Part 1 of this series (Accounting 101) and have made it to the end of this article, you are clearly serious about making FX Trading your profession or if you are already trading, looking for ways to improve your trading business and its bottom line. I commend you for that commitment.
Before going on to the third and final article, ‘Mental Preparation’ (to be published in September), I would encourage you to ensure that your Trading Business Plan and Trading Plan are written down in a clear manner and that you are comfortable with them. They should be clear enough that you could pass them to another trader to run your trading business for you while you are on holidays for six months!
I will be presenting a one-off Currency Forecasting Online Seminar on Saturday, September 22nd this year. For details, watch this short video.
If you are planning on attending this Seminar, now is the time to get your Trading Business Plan in order. Your Trading Plan may change as you begin applying some of the techniques that I will take you through on the day, but a key to success is a rock solid Trading Business Plan.