Let’s Start with a Trading Plan
Most traders that fail because they use another person’s system, or apply the investment recommendations of others without analyzing it themselves, or rely on the recommendations of the brokers. This happens because they do not take into account their own objectives. Without clear objectives, only time and money are lost.
Therefore, the trading plan must be written in writing. It is the only way to follow it and achieve the established objectives. You have to detail it, together with the objectives to be able to put it into action every time you want to enter an operation or position. Before this, you should review your trading plan. It is the key to follow our own rules and to detect if the plan works or not. In addition, you should check it regularly so that you maintain the focus.
At the beginning, you should evaluate the suitability of your trading system in demo account and then, if it works, go real. If it does not work, build another one and evaluate it in demo. For all this, it requires discipline and not fall into frustration, as it can be a long process.
How to create a trading plan?
It is sometimes difficult to create a plan when we are new, so here we will give you some tips and keys to build yours. Do not worry if it is not perfect (nothing is), you can adjust it as you take experience, or see what happens and what does not, then modify it. What you should not do is improvise, the plan must follow an order previously detailed by you: first you must decide where you will place the stop loss, because from the stop you will determine the size of the position.
Key points of a trading plan
Each person arms his plan according to a series of personal rules. However, we must all have some common aspects that should be taken in a trading plan such as the following:
The Trading system
First of all, a trading system must have positive hope in demo, and then prove it in real. The trading system is a set of self-imposed rules that will tell when to enter and when to exit the market.
To test a trading system, we must remember that it is never really finished as we must constantly check its behavior and performance against the different scenarios that occur in the market. Also, we must remember that it uses historical data, therefore it does not guarantee that it will continue to be so in the future.
Beyond this, if your trading system has shown good performance and strength in various market conditions, it will surely give you positive results.
It is very difficult to design a system that works well and results in any market condition. For example, if a system behaves well in clear trends, it will hardly perform well in a market with a lateral tendency. For this reason, professional traders have several systems, so that they can use the one that has the best performance given the conditions prevailing in the market at that time.
By evaluating the system it is possible to establish the periods in which it is really effective, which are the indicators that work best, among others. The information that must be given by the trading system must be the following, at least:
Net Profit: It is the final result obtained after commissions and fees.
Time spent: The most advisable is to use the maximum possible period of time (ideally, it is years) to cover the widest variety of different market situations. However, at the beginning being novices, a minimum time of 3 years is recommended. When the real account is passed, the system must be tested without any variation in the parameters. If the results are positive, the system will be showing its validity.
Number of operations: The largest possible number of operations must be analyzed to validate whether the system is effective or not. At least 100 operations are recommended. Ideally, more than 1000.
Percentage of winning trades: It is quite difficult to find trading systems that have a percentage of winning trades greater than 60%. Generally, a trader has a system with a percentage of correct answers of 40% to 50%. When evaluating a system it is necessary to see the effect that stop loss have on the percentage, because sometimes at the beginning it may happen that they show high percentages of winning operations but this may not reflect the reality. It is likely that it is a system that has operated only under the best conditions but that has not yet been used in all the conditions that the market may present. You must be careful when you evaluate your system and take this into consideration.
The ratio average profit / average loss: must be greater than 1, especially if the percentage of winning operations is quite low.
Probability of losing everything:
calculate the probability that the system has to produce the total loss of the money in the account, assuming that the worst results are combined