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How to Create a Trading Plan | Podcast

How to Create a Trading Plan | Podcast

2019-01-29 09:03:00
Ben Lobel, Markets Writer
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Key Points Covered in This Podcast

  • A trading plan is just as important for psychology and risk management as it is for strategy and analysis
  • A minimalist approach prevents 'paralysis by analysis'
  • Seek favorable risk to reward ratios over high win percentages

In the first part of our Trading Global Markets Decoded podcast, we spoke to one of our most popular analysts, Paul Robinson, about how to become a better trader. In this next instalment, Paul talks about how to create a trading plan and the importance of not overcomplicating your approach.

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Creating a trading plan is an important step on the road to more consistent trading. But as DailyFX analyst Paul Robinson says, while effective analysis and strategy is key to any plan, it’s useless unless you learn how to implement it and get your psychology right.

‘Psychology I group with risk management, and psychology issues come from poor risk management, which is a different problem to looking at a candlestick,’ Paul says.

Trying to take on too many indicators or oscillators, or ‘paralysis by analysis’, is a problem for many aspiring traders, he says, meaning a more minimalist approach is advocated. ‘There is a lot of information out there, and I’m not confident people can process large amount of information efficiently.

‘The plan needs to be minimalist to a point where you can take out that noise but not so simple that it’s basically like a line chart.’

Implementing a Strategy

So if Paul were write his strategy on a 3x5 index card, what would it say? ‘[Strategy] is really a series of questions,' he says. 'What is the trend and what are the market conditions; is there support and resistance, if so where; are there confluences?

From there, if there’s an uptrend Paul looks to buy a pullback into support, and if there's a downtrend he’ll be seeking to sell a rally into resistance. ‘Ideally you get some sort of candlestick formation that shows you the price action right at those levels. So you have your trend, you have support, now do you get a bullish reaction when the market touches support; is there someone besides you buying at that support level?’

Having a trading plan is key to systematic trading.

Next comes good risk-reward potential. ‘For me it has to be 2:1 or better. If its 1:1 I avoid it and I don’t care how high percentage it looks.’

The final part of the equation comes down to trader psychology, Paul says. ‘The final question I ask, is if I make this trade, and it doesn’t work, will I be ok with the loss?

‘And if you can unequivocally say yes, then that’s a good trade, win or lose. You can qualify a good or bad trade not by whether it wins or loses but by if you followed your plan or not.’

Following that plan can be hard when the market is moving around on you and uncertainty is kicking in, but as Paul says: ‘You’ve got to ride it out and have the confidence you’re making the right trade.’

The Importance of a Favorable Risk-Reward Ratio

The average trader who’s profitable does not have a high win percentage, but a great risk-reward ratio, Paul says. ‘A lot of people seek that high win percentage as they don’t want to lose, but they’ll make these low risk-reward trades, and end up being breakeven or worse.

‘It’s not about always being right, but it’s about being big on the occasions you are.’

No one trade should make or break a career, Paul adds. ‘It’s a series of trades, a marathon not a sprint. If you miss a trade there’s always another one round the corner.’

Be Sure to Check out Paul’s Series on Becoming a Better Trader

Paul Robinson recently recorded a series on how you can prepare your trading for 2019, as well as building up a respected library of webinars and how-to videos on DailyFX that deal with the core tenets of successful trading that you can access here.

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