Have you ever had to assemble or build something, but didn’t have the instructions to do so? If you’re building a bird house, or something simple like a cabinet, you may not need the instructions. If you are building a house, that is a different story. Building a house without a blueprint can be very dangerous and end as a complete disaster. Yet, many of us treat our forex trading in this way. As Forex traders we are attempting to build a “wealth house”, but some of us are not using a blueprint. It is dangerous and will almost always end up disastrous. A Forex trading system is the blueprint to your trading. Without planning ahead by establishing a Forex Trading System, you are planning to fail. A Forex Trading System incorporates goals, an entry strategy, trade management, risk management, account management, and a plan. I encourage you to consider whether or not you truly have a blueprint for your trading. If not, you can write one down today!
Goals are what will help you persevere through the times of losses as a trader. A goal is what you are looking forward to accomplishing, by result of your trading. This is the reason that you are trading. This is the “why”. Wanting to make more money is a general goal, but as you write down your goals, be more specific. A few examples would be: ” I want to double my account in the next 2 years.”, or “I want to be able to pay off my daughters college tuition with the funds I earn trading Forex.” You can establish six-month goals, one-year goals, two-year goals, etc. These goals are personal and totally customizable. When you establish the “why”, “why am I trading”, you can stay faithful to the “what” (the rest of your Forex Trading System).
The entry strategy is what puts you in the position to potentially profit. The entry strategy decides what point you will enter the trade. Whether you use a moving average cross, a trend-line-break, a forex news announcement, a different indicator’s signal, or a different entry signal, establishing a head of time what signal you will enter on is critical. Your entry strategy determines when you are going to enter a trade to risk your money, so taking extra time to consider where and when your entry will occur is well worth it.
Many times we treat the entry strategy like it is the most important part of our trading system. That is arguably not true. No matter where you enter a trade, there is profit potential and a high probability that some time or another that trade will go into profit. It may take a few minutes, a few hours, days, or maybe even years but there is a good probability that sometime that trade will go into profit. Therefore, your discernment on where to exit that trade is very critical.
There is a lot to be said about money management. Trade management incorporates everything between the opening of the trade and closing the trade. Having a plan for every possible scenario in that time period is crucial, if we want to be successful. Remember, if you fail to plan, you are planning to fail. These are some questions to ask ourselves before every trade (this list is not extensive):
- Is there a hard profit target?
- Is there a trailing stop?
- Do you take partial profit?
- How much profit do you take?
- When do you take the partial profit?
- How many times do you take partial profit?
- Is there a point where you would add to the trade?
- Should you ever pull the entire trade off before it hits a stop or target?
- How do you handle the trade if news is coming out?
Account management is composed of how you will treat the funds in your account. Will you take funds out of your account every month? Will you keep adding funds into your account every month for two years straight?
It’s good to have discipline in this. What are you able to reasonably do? Figure it out, write it down, and do it. Developing your Forex trading system is not something to do rashly, take your time. Research. If you want to take several months or longer to develop your system, before trading, go ahead and do that, don’t be caught up in some kind of get-rich-quick mindset.
Risk management is so vital to a successful trading system. It is glue that holds it together. You can have the best entry strategy, trade management, and account management, but without risk management, you can lose everything, very fast.
Beginner traders can struggle with this a lot because it is tempting to risk more money when you see a potentially high profit trade. If you have an entry strategy that incorporates different levels of risk for different signals, that is fine. Just entering a trade with higher risk because it looks like a “better trade” is very unwise and is a sure way to hurt or wipe out your account in no time.
Your trading plan encompasses all of these aspects. The plan is what brings everything together and provides order to how these five components operates in unity. Just as car has many parts, but only functions while they are together, so your trading plan needs to bring the goals, entry strategy, trade management, account management, and risk management together.