What is a Trading Plan?

Now that you’re about halfway through our College of Forex, here’s one piece of advice you should always remember.

Be your own trader.

In other words: Don’t follow someone else’s trading advice blindly!

Just because someone may be doing well with their method, it doesn’t mean it will work for you.

We’re all in different situations in life, and we all have different market views, thought processes, risk tolerance levels, and market experiences.

Have your own personalized trading plan and update it as you learn from the market.

Developing a Trading Plan and sticking to it are the two main ingredients of trading discipline.

But trading discipline isn’t enough. Even solid trading discipline isn’t enough.

It has to be rock solid discipline.

We repeat: rock solid.

Like a brick wall.

Plastic solid discipline won’t do. Nor will discipline made from straws and sticks. We don’t want to be little piggies.

We want to be successful traders!

And having a brick solid trading discipline is the most important characteristic of successful traders.

A trading plan defines what is supposed to be done, why, when, and how. It covers your trader personality, personal expectations, risk management rules, and trading system(s).

When followed, a trading plan will help limit trading mistakes and minimize your losses.

After all, “If you fail to plan, then you’ve already planned to fail.”

A trading plan removes any bad decision-making in the heat of the moment.

Your emotions can consume you when money is on the line, causing you to make irrational decisions. You don’t want that to happen.

The best way to prevent it from happening is to minimize (notice we did not say eliminate) thinking by having a plan for every potential market action.

With the right trading plan, every action is spelled out, so that in the heat of the moment you don’t have to make any rash decisions.

You just simply stick to your trading plan.

The Difference Between a Trading Plan and a Trading System

Before we continue, we have to quickly distinguish the difference between a trading plan and a trading system.

• A trading system describes how you will enter and exit trades.
• A trading system is PART of your trading plan but is just one of several important parts, i.e., analysis, executions, risk management, etc.

Since market conditions are always changing, a good trader will usually have two or more trading systems in his or her trading plan.

Trading systems will be covered more in-depth later on in the lesson, but we thought that it was important to point out the difference between the two upfront to avoid any confusion.

Reprinted from Babypips, the copyright all reserved by the original author.