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Trade Planning and Testing

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To make your trading plan and trade strategy just answer these questions then move on to the testing section below.

1/ TRADING PLAN
a) System
What type of trader will I be? Swing, trend trader, trend follower, day trader, Elliot Wave, Fibonacci, option trader, another, or a combination?
What time frame will I be trading on?
What will I be trading?
Will I trade long or short or both?
What has to happen to invalidate my trading system and make me look for flaws in my thinking?

b) Psychology
How big of a position size can I mentally and emotionally handle trading?
Does my chosen trading method fit my personality for activity and risk tolerance?
Do I actually enjoy trading?
Do I have the mental strength to persevere until successful in trading?

c) Risk
How much of my trading capital will I risk per trade?
How many losses in a row with this level of risk will lead to blowing up my trading account?
How much will I lose at one time if all my open positions go against me at the same time?
How correlated with each other are all your open positions and your potential trading vehicles that are on your watch list?

2/ TRADING STRATEGY
What signals my entry?
What will signal my exit?
Where will the initial stop loss go?
Do I use a trailing stop or a price target to lock in profits?
What is the probability of my trade working out based on historical data? (see testing below).
 

 

STRATEGY TESTING
Ok, so you've discovered that a random approach doesn't work so you've found a strategy but you'll have no confidence to trade with real money until you've proved to yourself it actually works and that means testing and collecting data over a number of trades on demo first.

The simplest data to collect are the win rate and the average risk/reward ratio of say 20 demo trades, you can then plot these onto a profitability graph to see if the strategy actually works before you risk real money.

To collect the trade data you will need a simple spread sheet, try this one https://forums.babypips.com/t/free-excel-trading-journal/52738

image.thumb.png.f26146e9f1bc5ee5c79e316aab6ebeef.png

 

Just fill in these 9 green boxes for excel to auto calc the Win rate and the average Risk/Reward Ratio.

The date is by drop down box as is the asset, you can change the list of assets to whatever on the 'List Variables' tab.

Use the Take Profit as the exit price even if it's a loss and leave the Exit Price column blank.

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image.thumb.png.7424e8c0d43e825c61d4b8b41519797b.png

 

Take the Win Rate and the Average RRR and plot them on the graph, anywhere above the red line is profitable, below the line is not.

image.png.7ce8ec1e77734e2d7e142ced9eacaedf.png

NB/ The journal works fine on windows excel but if opening it in Windows 10 OpenOffice you will get the 'invalid entry' pop up for columns G,H, and I, click on the letter to highlight (G, H & I) > data > validity and uncheck the 'show error message'. OpenOffice has also allocated the currency dropdown box for G, H & I so just ignore.

 

So now you have a trading plan, that probably won't change much unless your circumstances change, and you also have a trading strategy to bolt onto the plan, you may have 2 or 3 of them, say a buy the dip strategy and a breakout strategy, and you also have a means to test that strategy on demo to gauge if it really does have a chance of working out on a live account.

You may go through a number of strategies or make changes and retest again and again before finding something to test on a live account but at least you're not losing real money to find out if it really works or not because if it doesn't work on demo it won't work live.

Best of Luck

 

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If you have found a set of rules that work for you and the type of trading you are comfortable doing, stick to them.

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Here is the most important reason to have a plan, some are at the stage where they are realising this is not as easy as it first looked and their hard earned money is disappearing fast, then comes the Fear.

"Anyone can place a trade. But doing so when it's most needed requires immense psychological fortitude. You can't teach that. It's not on the internet or in a book. Instead you need to experience the fear. Nurture it. Become comfortable with it."  - @thechartist

Without a proper plan you have no anchor, no grounding, no base - you won't find that psychological fortitude and the fear will have you floating in a state of paralysis. 

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Earlier in the thread we looked at journaling trades, specifically to get the win rate and the average risk reward ratio and plotting these on the profitability chart, there is much more to be gained from journaling, more latter, but first here is another important reason to know these stats.

The probability of having successive losing trades and could your risk management plan manage it?

Say your win rate is 50% (which is quite high, many traders survive on less) so the probability of having 6 successive losing trades within a 50 trade period is about 50%.

So with a win rate of 50%, how much of your account balance are you willing to risk on each trade knowing there is a 50% chance of having 6 straight losers within a 50 trade period?

image.png.a8afcfbc6df5d7046c07c683f0aec176.png

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Lots of valid points @elle, hence the importance of logging trades in a journal that can be reviewed and that can provide statistical feedback.

I was waiting for the promo for Edgewonk 🙂

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Posted (edited)

The advantage of spending so much time planning and organizing that you don't have any time left over to actually trade is that you will lose less money.  The organization skills you develop might even help you get a real job.  Genius.

Edited by dmedin

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Reminds me of when I was finishing school, and the 'careers development' teacher asked me what I 'wanted to be' (as if 16 year olds are supposed to know what they want to spend the next 50 years of their lives doing).  I was too honest and said 'I don't know'.  So she gave up on me.  Turns out I should have had a plan.  Oh god!  If only I had had a plan, everything would have gone exactly according to said plan.  Woe is me!  But for a plan, the world was mine for the taking!

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Posted (edited)
9 minutes ago, dmedin said:

The advantage of spending so much time planning and organizing that you don't have any time left over to actually trade is that you will lose less money.  The organization skills you develop might even help you get a real job.  Genius.

Once you've done the planning what's left to do but pull the trigger. nothing. better that way round than scrambling to cobble together some kind of a plan after you're already in it up to your neck 🙂

Edited by Caseynotes
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I made a boo boo again.  Should always respond to what the charts show and not go on feelings, huh.

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5 minutes ago, dmedin said:

I made a boo boo again.  Should always respond to what the charts show and not go on feelings, huh.

yes, it turns out that the market really doesn't care about your feelings apparently 😢

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10 hours ago, Caseynotes said:

 

I like it overall but I notice that there is not one single reference to volume.  The people at IG/DailyFx seem to think volume is totally irrelevant.  That's a huge mistake, I think.

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