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Build a trading plan

An important aspect of trading psychology is creating and maintaining your trading plan. As a famous saying goes: "If you don't plan, then you are planning to fail."

The plan is closely linked to the trading principles of the trader. Experienced traders are well aware that trading principles and trading methods are critical to their long-term survival in financial markets. Currency market participants earn profits when using demo accounts, and it is common to lose money after starting a real trade because they do not take the trading principles into account when they are actually trading.

Introduction

The first step in creating a trading plan is that the trader needs to decide which market conditions to trade. Usually traders enter the market with two different preferences, that is, the market trader, or the reverse market trader.

(1) Traders

with the market follow the market to try to seize the long-term market trend. In the above chart, the EUR/USD currency pair has shown a downward trend in the past two weeks. Traders on the market will enter the market with specific skills as they believe the trend will continue for a relatively long period of time. In the above case, the trader opened a short position on October 4, holding a position until the 15th showed signs of “doing more”.

(2) Counter-market traders

Other traders attempt to trade under market conditions where prices are stable or ranged. They are not limited to trading in markets with long-term trends. Market changes can be divided into three kinds of trends: rising, falling, and oscillating within and outside the range. Counter-market traders prefer foreign exchange trading in a floating market.

In the floating market, counter-market traders will try to sell at low prices, sell at high prices, or sell at high prices and buy at low prices. In the above graph, the trader will sell the currency pair when the price rises to a certain price and buy the currency pair again when the price reaches a new low. Of course, the number is only a simple reference. The trader needs to have good intuition and technical analysis ability to support his/her expectations of the market trend. Counter-market traders rely heavily on support and resistance, and are prepared to reverse trade with current trends when they judge that market movements will rebound or fall back. Counter-market traders also need to beware of the potential risks of price breakouts and changes in current market trends.

Decide which trading style to choose

Market-goers try to buy a currency pair when the market moves up and sell the currency pair when the market moves down. Counter-market traders try to go against the market, that is, short in the bull market and long in the bear market. Of course, traders can also use two trading methods at the same time, but focus on one of the methods that is more suitable for their trading style. According to the current trend, the reverse trading is based on different trading psychology, because the trader believes that the market will reverse, it is not appropriate to continue to do more when rising. However, since the market has one-third of the time in the back and forth shock period, sometimes traders should choose to reverse the market; or traders can sit and watch this change and wait for the next big trend. In order to improve the trading method, the trader must decide the trading style that suits him, depending on the trading psychology and what market conditions he/he likes to trade.

Choose trading tools and trading exercises

The next step for traders to improve their trading methods is to choose a trading instrument that enters and exits the market. If a trader wants to use technical analysis, it can use trend lines, support and resistance levels, Fibonacci Retracement, and various technical indicators. Traders can create their own trading plans based on the above tools. The core of the trading plan is to look for trading signals to determine the market entry and exit. Traders using fundamental analysis also need to develop trading plans, which include tracking economic indicators and market conditions to determine market entry and exit.

Traders can find out how to use a technical and fundamental analysis to create a trading plan through many resources, including this website. When a trader has outlined some of the principles of how it will enter the market and close the trade, to be cautious, it is necessary to practice trading through the demo account before accumulating the account to accumulate experience. For a trading plan, it is important to be able to cope with unpredictable market changes; therefore, trading methods must take into account market noise factors. When using a demo account, traders can psychologically train them by practicing trading principles and using a trading plan. After the trader succeeds in the simulation exercise, the real trade can be started in due course. Compared with the demo account, the initial stage of the real transaction is accompanied by a period of learning curve, because the conditions of real trading are slightly different, and when trading with real money, the trader will also invest in personal emotions.

Risk management skills

Reduce levels - risk to return discussion

This is a foreign exchange trading psychology that traders don't want to hear but is very important: the trader needs to understand that unless he/she has enough account funds to resist the adverse market trend, his/her account funds will be treated as For risky funds. Foreign exchange differs from other forms of investment in that traders, depending on their leverage ratio, may also be prepared to make all their accounts short of shortfalls. Of course, the purpose of making a trading plan in reality is the opposite, that is, in order not to lose money. When starting to develop a trading plan, the trader also needs to decide the level of account fund reduction that he is willing to bear psychologically.

Aggressive traders may be willing to take on relatively high risks to win bigger profits. For example, he/she may be prepared to face a 50% reduction in funding in order to achieve a certain result. Conversely, conservative traders may only want to earn less profit, but the amount of money they are willing to pay is also small, such as 10%. The numbers listed here are not practical, but are used to explain that some traders may be willing to take on greater risks, while others are more conservative.

Why discuss the reduction of potential assets? Because the trader must understand that if his/her transaction has no return, it has been losing money, and the account funds are close to their set maximum reduction level, which means that his trading method or trading tools used must be problematic. Maybe you should stop trading at this time and re-evaluate the analysis method he/she uses.

It is normal for any account to have a loss, but if there is a sustained loss and the loss already accounts for the majority of the trader's account funds, it needs to be taken seriously. Smaller losses are part of the trading plan, as some positions will be closed at a loss and some positions will eventually be profitable; but it is important that the average of the loss and profit positions must be positive. This means that the profit portion accounts for more than the loss portion, and thus the entire account assets grow.

Risk exposure for each transaction

The reduction in the maximum capital operation of a trader is related to its capital management skills, the risk exposure of each transaction. The risk exposure of each transaction is a technique for how the trader allocates funds to each transaction. This means that the trader is willing to give the risk of each transaction.

Many traders often think that if they see a potential deal, they are willing to take a large part of the money to get a good return. The failure of a transaction is often due to the fact that the trader wants to make a quick profit and get rich by one or two transactions. Traders should maintain the consistency of the trade and earn a profit above the loss on average.

Suppose a trader has a $10,000 account and wants to allocate 5% of each account. This means that the trader is willing to bear a risk loss of $500 for each transaction. If the position change moves 5% in the opposite direction, he will close the position according to its trading risk exposure principle. When a trader has a specific trade exposure for each trade, this will prompt him/her to adhere to the trading principle to limit its emotional factors affecting the trade decision. Again, the data used here is for example only and should not be applied to reality. transaction. If the trader is not sure about the allocation of funds for each transaction, he should seek guidance from his financial advisor.

Example: Calculating Risk with Risk Exposure for Each Transaction

As an example: On October 12, I traded as a city. When I see a price change that will form a new round of upswing, I want to buy a currency pair when the price reaches 1.2575.

Assume that from the previous support level, I set a stop loss of 1.2480, which is about 100 points.

If my account is worth $20,000 and each of my transactions is exposed to 5%, the risk I can afford for each transaction is $1,000. If I open a standard hand contract, then the range from the opening of the account to the stop loss of 100 points is in line with my 5% funding requirement. Therefore, 1.2575 to 1.2480 is the existing risk after I open the position.

As long as the price changes within 100 points, it is considered to be interference. If the price slips to 1.2480, then the previously set stop loss order will automatically close the position.

Predictive noise


The trader opened a long position and conducted a technical analysis. After opening the position on October 13th, the price moved in the opposite direction!

Risk management techniques are used, such as traders with risk exposure features for each transaction, and once the market fluctuates in the opposite direction, it is less likely to be liquidated immediately.

Traders who have developed a risk management plan are less likely to worry because they have set when the market will continue to move in the opposite direction. Therefore, the fluctuation of the price after opening the position (3) is regarded as noise. Using this trading strategy, traders can regain profits when the market rebounds. For traders, fortunately, when the market is changing in the right direction at the right time, it will be very close to the stop-loss position. However, if the price does not rebound but continues to fall, the trader's trading position will be forced to close when the price hits the maximum risk rating.

Weighing the position size

The trader buys a position here. In another case, the trader wants to enter the market when the break is high (1) and set a stop loss at 1.2480. When October 19th, the price broke through 1.2575.

Let's first look at the trader who has $20,000 and wants to spend $1,000 (5% of the account funds) as a risk exposure for each of his transactions. Since the market price is still 100 points away from the stop price, or $1,000 from a standard hand, the customer wants to participate in a standard hand operation. When this is done, the market moves in the opposite direction and a stop loss order is executed, and he loses 5% of all his funds.

If another trader also chooses 5% of its funds as a risk exposure for each transaction, and a stop loss is placed at the same location. However, because her account funds are only $10,000, she is unable to open a standard hand position. If the client opens a standard lot trade and the stop loss order is executed, she will lose 10% of her account funds instead of 5%. Therefore, her risk exposure for each transaction should be set in 5 mini-hands or 0.5 standard-handed transactions.

After the price of the 14th bottom, the currency pair began to rise again, the trader wants to enter the market when the price breaks through the new high of 1.2520 (5). He will find an opportunity on the 15th or the 18th. Entering the market here and setting the same stop loss means that the trader can choose a larger operation to trade, so the market price and the stop limit price are less than half of the original.

For accounts with $20,000, using 5% as risk exposure for each transaction requires 2.5 lots of transactions. Moving 40 points in the opposite direction reaches the stop price, which is equivalent to a $400 loss from a bidder. Therefore, the trader chooses $1,000 as the risk exposure for each transaction and divides all $1,000 (the risk exposure for each transaction) into $400 (that is, the amount of money that can be lost per bidder) as it is here. The largest surgery that can be lost in a position. For example, a 1 positioner's position will use 2% of the total funds (20,000/400 = 0.02) if the stop loss is executed; 2 positions for the 2nd hand, and 4% of the total funds will be used when the stop loss is executed. The risk exposure for each transaction for the trader is 2.5 lots.

In the same situation, if there is $10,000 in the trader's account and 5% is selected for each transaction risk, then her open hand should be 1.25 lots. This value is determined by the risk capital of each transaction, which is $500. The maximum loss per hand is $400. Therefore, $500/$400 = 1.25 lots.

Trading psychology

Flexible trading strategy

Traders should choose a flexible trading strategy based on their profit and loss. Basically, there are a number of ways to control the number of lots based on the total amount of funds. There are complicated ways and simpler operations. The easiest way is to use the proportion of funds allocated, as described in the previous page. If the trader is profitable, the position can continue to increase as the total funds increase. Traders should use open positions or trades in a variety of ways, rather than increasing leverage (building too large positions) resulting in huge losses in lost trades. As each loss, the amount of loss in the next position will be gradually reduced, and the risk exposure of all positions will be reduced.

As we all know, the market is changing all the time. Therefore, traders will constantly adjust their trading plans according to market conditions. Trading strategies are not static. The more flexible the trading strategy, the better the trader. But there is a misunderstanding that some traders will frequently change trading strategies based on market changes in a short period of time. This can lead to adverse consequences. If the trader believes it is necessary to change the strategy frequently, then its core trading method may be problematic.

To restate the above points, the trading strategy needs to be based on evidence. This means that the trading plan can withstand the test of market changes and has some flexibility, but it does not mean that the trader needs to re-examine its trading strategy in the transaction.

Use a trading plan to control emotions

The market is dominated by four basic human emotions: worry, greed, excitement and despair. The fluctuations in these emotions and how they affect traders will be reflected on the chart. Extreme situations, such as panic selling or chasing highs, are caused by these emotions. The trading plan is created to manage the emotions of the trader.

Since all traders are ordinary people, it is human nature to generate mood swings when trading changes. If the market moves in the direction expected by the trader, the trader will be happy and excited; if the market moves in the opposite direction, the trader will feel angry and even frustrated. Traders need to set a trading plan because they try to predict market movements before placing an order. In other words, each time a position is placed, the trader will set the steps for the trade based on the market movements that he or she predicts. These steps can have potentially good or bad results for your account. When the trader already has a position to open and cannot predict the next step, emotional factors will affect his judgment. When the trader has previously determined the trade summary - the trading plan - this plan will protect the trade from emotional influence.

There is a potential danger if a trader fails to act as required or follow its trading plan. Many traders have failed because they have made plans and have not followed them. They are too emotional and far-reaching. They think: "I don't deal with this deal because I know the market will move in the direction I expected." This is the root of the failure. Traders should not arbitrarily change their trading plans unless they act after carefully weighing their overall trading strategy. If the trader has a better plan, then he/she should use this strategy and follow through.

Create and save a trader diary/log

In order to maintain a trading plan, it is important to create and maintain a trader's log. The trader's log records the information and points of each transaction.

The most important record in the log is: when to trade, open positions (currency pairs and position size), opening direction. In addition, traders need to generally describe the reasons for opening a trading position. The main tools used by traders should be described in the trading plan, and there is no need to continue to explain which tools are used for trading in the log.

Suppose the trader uses three moving average crossings to seek trading signals. When a buy signal appears in the trade plan, he needs to record the purchase currency pair EUR/USD in the transaction log and short at 1.2510. Because it is a bear market cross here, and he waits for the bull market to cross and then closes. Traders also need to record the maximum risk they can bear when the market moves in the opposite direction.

Trader's log: Recording trader's failure to comply with their trading plan

If the trader is unable to comply with his trading strategy, he/she is very likely to close the position too early. If any unknowns occur and the market fluctuates in the opposite direction, the trader may not be able to continue operating when the market turns around due to fear of sloppy closing. This will lead to unpleasant trading experience.

Another mistake is that the trader did not close the position at the planned exit signal because Cherry believes the market will continue to rise. Even if the initial analysis is correct and the position is in a profitable state, the market may move in the opposite direction and not in the direction of the trader. Since the trader has already made a profit at this time, greed will drive it to continue to hold the position until the market falls back to its entry price. If the foreign exchange market continues to fall, he/she will start to lose profit after the profit status.

Two important things that a trader needs to record in the log are a lossy trade and a trade that is not operating as planned. Until the trader can control his emotions, it is difficult to make a wise choice when trading. However, if the trader can record his trading history, after that, he can still analyze the cause of the operational error and gain experience from this experience. Traders have paid the price for this operation, so it's easier to gain experience in it.

As a trader, you need to evaluate the trade for each mistake, reflect on it and find out the reason for the failure. Is it caused by emotional reasons? Or is it because the trader did not accurately execute the trading plan? Or is this just a special case of many traders' normal trades? Answering these questions will help traders better gain experience from each successful transaction to guide their future foreign exchange trading operations.

Risk warning:All foreign exchange, precious metals are accompanied with great risk, therefore is not suitable for all investors. Please be sure to fully understand the risks at your own can bear within the scope of the investment. More risk for details, please refer to the risk of WSG statement and deposit policy.