Review: Planning Your Trades

Last updated 10/28/2009 7:31 PM EST (GMT -5) 15 Comments

Forex Trading involves high risks, with the potential for substantial losses and is not suitable for all persons. Past performance is not necessarily indicative of future results.

Bradley W. Gareiss

Technical Analyst, GFT

When most people start trading, they do not put much thought into their trades. They will either buy or sell a currency pair (probably the EUR/USD) because they think they see a trend or maybe even because they put a moving average on the chart. Sometimes there is no reason at all for the trade, they just want in. Either that trade nets a small profit or the trades starts going against the new trader. The trader that gets the small profit will feel invincible and likely base trades in the near future on the same reason as the first one. Of course they expect every trade to win. The trader whose position moves against them leaves their position open, stares at the their computer without blinking, and laments that they will get out if the market only goes back to break even.

Sooner or later, the trader who won their first trade puts on a loser and acts much like the trader above who lost their first trade. After a large loss to the account, the trader then puts on a large position trying to win it back. Inevitably that trade crushes their account, or a trade soon after will. Sound familiar?

The reason that new traders blow out their account is that they assume trading is easy, they don't realize the role their emotions play in trading with real money, and they have no trading plan. Well, it doesn't take long to learn on your own that trading isn't easy, so we won't spend too much time discussing that. However, using a consistent trading plan is the only way to reign in your emotions and develop consistency in your trading. If you enter at random places and exit when your "gut" tells you to, you are in for a lot of pain.

Every remotely successful trader I have ever spoken with has a trading plan. These traders do the same thing every time, occasionally tweaking one aspect of their plan at a time. Trying to change everything at once makes it impossible to tell what is working and what is not. We will go through the important aspects of a trading plan below, and we will go over how the FX360.com technical analysis works with these principles.

First off, I believe it is imperative to identify your entry, stop, and profit target(s) before entering every trade. If you try to determine your exits once you enter the trade, your emotions will skew your view of the facts unless you are a robot. If the exits are planned before entering, it is tough for your emotions to screw you up. By placing your exits in the system when you enter the trade, it is much easier to stay disciplined to your plan. Another advantage is that you don't have to stare at your computer 24 hours a day waiting for a place to exit.

I also feel it is important to know your risk:reward ratio before entering a trade. How on earth can you determine your risk reward:ratio if you don't plan your stop and profit target(s) before entering the trade? It can't be done. To measure this ratio, simply divide the distance between the entry and the profit target by the distance between the entry and the stop. Everyone's concept of a "good" risk:reward ratio varies, but I prefer to have a risk:reward ratio around 1:1.5.

Once you have planned your entry and stop, you can also determine your position size. Your position size should generally be the same percentage of your equity each trade. Most traders risk 1-3% on each trade, using the same percentage for every trade. In other words, all trades are weighted equally. The same amount of capital should be risked on a trade with a 300 pip stop as a 30 pip stop. In order to determine your position size, simply multiply your total equity by your percentage risk per trade (typically 1-3%), which is the amount of money you should risk per trade (X). Next, multiply the number of pips between your entry and stop by the currency's pip value (Y). You can also draw a line from your entry to stop using the value calculator to get Y. Then divide X by Number Y to get the number of lots you should trade. Once you practice this, it is easy.

The methodology we use (geometric pattern recognition) makes it very easy to follow this plan. Everything is already planned out, all you need to add is your total equity and percentage you want to risk for each trade (typically 1-3%). By planning your trades out before you enter you can now trade on any time frame because you are risking the same amount for each trade. This will lead to much more consistent results that using static numbers when determining position size.

Comments (15)

indaba

October 28, 2009 at 11:11 PM ET

Well Brad it's obvious you have been spying on me! and I do need to formulate a plan and stick to it. However even if you do lot's of technical analysis and fundemental research and put on a trade and things are looking good, then a central bank injects or removes billions all of a sudden you are having a bad day! how do you suggest I avoid the unknown? and all you brokers have much better /faster visibility into what's going on. So dont the institutions have an edge that us retail guys never will?
Thanks
TD

bgareiss

October 29, 2009 at 12:24 PM ET

If you want to avoid the unknown, don't trade. All kidding aside, we know very little about what is actually moving the markets, and it really doesn't matter. I am not sure how brokers could have better/faster access to prices in forex. The only source of information that is always true is the price, which everyone has access to at the same time. As far as I know, there is no magic secret. Brad

fuji

October 30, 2009 at 02:03 PM ET

could not agree you more Brad, don't trade, if you don't want to avoid the unknown. Trading is speculating. Its all about probability and pay out. just keep it simple as is. Therefore we all need a Trading plan and sound RULE to guide through every trade.

milanh-fx

October 29, 2009 at 12:26 AM ET

Nice tutorial Bradley, but by 1,5 r:r you need almost 40 % win trades. With 30 pips S/L it´s not possible with today´s vola. Would you make a depot for 1 month to show, how it works? Thanks Milan

bgareiss

October 29, 2009 at 12:28 PM ET

I am not sure how detailed I can get on these posts, but 40%+ is definitely possible to attain over a long period of time (hundreds of trades) when using a 1:1.5 R:R ratio. Also, I have no idea what 30 pips has to do with this. We always adjust our position sizes so that we are risking a set percentage regardless of how far the stop is from the entry. And I am unsure what a "depot" would be in the context of your sentence. Could you please clarify this? Thanks. Brad

Julian

October 29, 2009 at 10:24 AM ET

This article describes me perfectly! If I have a trade in progress I am basically in front of my laptop until it is profitable, if I have to leave the house I am checking my Iphone every 5 minutes for an update. Please tell me you guys & girls at GFT are human and were once like this!!! I need to develop a plan that is far less stressful, I`l be watching this space for more articles like this!

Regards, Julian

Melbourne Australia

bgareiss

October 29, 2009 at 12:20 PM ET

It is tough to keep that up when Forex is open around the clock. I think it is important to have a plan that sets up both the entry as well as the exits to avoid this situation. Brad

milanh-fx

October 29, 2009 at 01:48 PM ET

Hello Bradley, i am watching your recommendations for about 3-4 months. Because i trade my own pairs anyway, i take
a look to, what you trades do. Many of you gartley patterns give approximately a trade for about 45-50 pips target, so by 1,5 r:r you have to make a S/L by about 30 pips. For instance, you most recently rec. EURCHF is a similar.

With a public depot, you can prove, you are right and you theory is achievable. I had the feeling, last 3 monhts was not many trades the winners ( in any case not 40% ). This is not a hostile call, but i can differentiate between theory and real trading.
I trade for about a 25 years and still trading.

Many regards
Milan

bgareiss

November 02, 2009 at 04:28 PM ET

I am not sure how much detail I can go into about this, but if you went through every trade, I think you would come to a different conclusion. Again, not trying to be hostile, but I want the facts to speak for themselves. That is not to say what will happen in the future of course. Brad

Ichweissnicht

October 30, 2009 at 06:05 AM ET

hello!
first time to read your article.
This article is excellent. I have experienced terrible trading life, which is without trading plan and discipline. but after one-year terrible life, i change 100%. I write my trading plan and stick to it. "Plan the Trade, trade the Plan."

Trading plan and discipline keep us alive in the market.! it is the truth of trading.!!

"Keep is Simple and Stupid"---yes, i agree, trading is simple, but not easy...

all the best, thx for your article.

bgareiss

November 02, 2009 at 04:30 PM ET

Good to hear, I am glad you enjoyed the article. Brad

DJFX

November 01, 2009 at 01:17 PM ET

Kathy,

With the recent shift in dollar sentiment suggesting greenback strength, do you suspect the NFP announcement will show a dollar rally and then turn around and decline as has been the pattern in the last several announcements or do you see an accelerated and lengthy rally this time, or perhaps even an accelerated depreciation in the single unit?

bgareiss

November 02, 2009 at 04:31 PM ET

DJFX, please send that comment to Kathy, and I am sure she would be happy to help you out. Brad

pp22

November 02, 2009 at 04:40 PM ET

Hey Brad
I dont know if the NZD/CHF was yours or Rogers, but if it was yours can you tell me why it was invalidated? Unfortunately I was in on that one and was stopped out. I can only assume it was due to long bars but at the time they didnt seem so long.

Thanks

Phil

bgareiss

November 02, 2009 at 05:58 PM ET

If it is the article titled "NZD/CHF Buy On Dip To 0.7530" then that was Roger's feature. Brad

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