The Art of Trade Planning

Price is the central aspect of trading. Essentially, the key to trading is to buy a security at one price and the close out the trade at a higher price, or sell a security at one price and then close out the trade at a lower price. With this thought in mind, all traders can essentially be broken into two categories—proactive and reactive.  Reactive traders are those who react to price. They see price move in one direction, and suddenly get enthralled at the idea of jumping into a trade. After watching the move continue for a few more pips, they finally jump into the trade just in time for price to completely reverse and begin moving in the opposite direction.

Proactive traders, on the other hand, wait for price. They do not ever chase price. Instead they conduct technical and fundamental analysis and decide exactly what area they want to engage the market, and then they wait for price to come to them. If they are scalpers they may wait 5, 10, 20 minutes or longer. If they are swing traders, they may wait several hours or even days. Position traders like Warren Buffet may wait for weeks or even months. The truth is that proactive traders have formulated a plan of action and then they wait for price to line up so that they can execute that plan of action.

Becoming a proactive trader is absolutely essential for trading success. Most new traders are reactive.  That is generally the natural progression in the trading journey. However, a transition must be made if one desires to reach one’s goals of trading success. A proactive trader is one who is in process of mastering the art of trade planning.

In order to properly plan out your trades, you first must have a strategy you believe in. This is a common cause of failure in new traders—they do not even have a strategy. Most new traders may believe they have some form of a strategy, but the reality is that many simply trade randomly and take trades that they “think are going to work out.” Trading in this fashion will drain your account very fast.

To be a successful, proactive trader, you must have a trading strategy that is written out in great detail. You should create a trading plan that is very similar to a business plan. It should describe the overall trading strategy in great detail. Mention the exact time frames you use for analysis, the time frame you use for trade entry and trade management, the pairs you trade, etc. Then, give several examples of a perfect set-up. What exactly do you want in a set-up? Spell it out exactly and in detail. This will help reinforce in your mind the exact parameters that you are continually looking for in the market.

Another major step in trade planning actually occurs after a trade is over. Analyze your trade. How did you manage it? Did you manage it properly? Did you make mistakes, or did you manage the trade perfectly? If the trade was a loser, it is absolutely essential that you analyze the trade closely. You will never learn as much from your wins as you will from your losses. In your losing trades, something happened that you were not expecting. What happened? By looking closely at your losers, you can oftentimes find small nuances in the market that may indicate that a trade continually fails when the market conditions do x, y, and z right before you enter a trade. Thus, you can dramatically increase your winning percentage in foreign exchange trading by avoiding taking potential losing trades. If you see that you are a reactive trader, then take a major step toward trading success today by writing out your trading plan.

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