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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

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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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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.

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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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Copied from another thread, useful advice for this one too.

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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?

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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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Including this from another thread to this one on reasons to learn trading using the MT4 platform.

MT4 Learn to Trade


Though there are many platforms to choose from learning to trade on mt4 stands out for a good number of important reasons. IG offers a multitude of platforms each with their own special features but essentially they all set out to do the same job. If you are just starting out you should not be looking to specialise but should first be seeking to learn the basic art of trading on a average market on a average time frame. Once you have learnt to use a platform picking up how to use any of the others is relatively simple and mt4 is good first choice.

 

Built in trading journal.

It usually takes a while before people learn that they need to be journaling their trades, all that time is wasted. And no, the account PnL is not enough, when you start out you will be trialing many different approaches, at some point you will realise you've come full circle, you'll stop to consider what you've learnt and you'll realise the answer is nothing because you have no record of what you've done and what worked when. With a journal you can review and compare different time periods and see without doubt what was working and by how much. MT4's built in journal starts recording your trades from day 1.

 

Micro lot bet sizes.

Demo is really only useful to learn the ins and outs of the platform, and maybe checkout the basic prospects of a new strategy, you will not learn to trade on the demo platform, you need to be risking real money, even if it's only fractions to begin with, start low with a view to build up as your skill and confidence grows rather than starting too high, panicking because of the risk and being forced to drop down, this crushes confidence. MT4 is the only IG platform where you are able to start at 10 pence per point (micro contracts).

 

All styles of charts.

Every conceivable chart type is available on mt4 (HA, Renko etc) allowing you to experiment and get a feel for them and find out early if they work for you or not, learning on a platform with only the basic chart types (line, bar and candle) will leave you wondering and looking backwards rather than forwards as you progress.

 

Every type of indicator.

The range of indicators available for free download is legendary, literally 10's of thousands. Same as for chart types, experiment to get a feel for what suits early on and develop from there.

 

Easy learn auto trading with mt4 EAs.

EAs were a main feature for mt4 right from the beginning. Trading robots are popular and mt4 has special features to make the use of Bots easy to learn and, as for indicators, there are many already written you can download plus there is lots of tuition on how to write one yourself.

 

Lots of help and support network via the mql5 community.

The resource pages on mql5.com for mt4/5 are huge and there is also a very large and active members forum, most any question you might have is likely to have been already answered, search and see, if an answer is not found just ask the community.


 

MT4 may well not be the platform you end up with once you have learnt the actual basics of trading, it has it's faults like any platform, doesn't cover stocks for example, but it probably should be the one to start out on to learn how to trade.

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Practice for the sake of practice does not make perfect, it just makes permanent. You will not eventually 'get it' by repeating 'wrong' continually. Reinforcing bad practice with more bad practice will only lead to failure. 

If something is not working seek to identify what is wrong and test alternatives.

The biggest problem is usually correctly identifying market type and structure, this is essential in order to know what strategy to apply and when, for example MA crossovers and dip buying type strategies will not work in non-trending markets or when the trend breaks down and they also won't work when buying directly into resistance or selling directly into support. And so strategies for playing ranging markets will always fail as soon as the market starts trending.

Strategies are designed either for directional (trend) or balanced (range) markets, imo its best to pick one to start with and get good at it before adding more, so you need to find the market to suit your selected strategy. 

Decide on a strategy, define the market type and structure it would need for it to work then sort through charts to find that market.  

 

 

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How does one pick the 'right' support and resistance levels?

I think that simple advice would be worth a thousand articles.

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2 hours ago, dmedin said:

How does one pick the 'right' support and resistance levels?

I think that simple advice would be worth a thousand articles.

Repeated from another thread.

1 hour ago, dmedin said:

'Knowing' what they are doing gives us the ability to 'hide' behind them.

S/R become more significant the longer the period of time they have been in place, and also the volume that has built up around them ...

I don't know how to pick the 'right' S/R so I just use Fibonacci ratios which usually seem to be a good approximation.

IG's DOM platform is free to use but you need a cfd account with a min deposit of £1000 (I think).

In fact drawing support and resistance levels is relatively simple and they are usually the site of clusters of resting orders as seen on the DOM platform and they also correlate well with futures options positioning.

You don't need to 'pick' them, you just need to be aware of them and look to see how price reacts at them because they are usually sites of breakouts or reversals.

Intraday I would switch to the daily pivot points calculated by the 'Floor' method as the IG default uses but not on a Monday as the 1 hour Sunday candle distorts. The intraday pivot levels are available at the start of day and often correlate well with the H4 and H1 support resistance levels drawn at end of day. 

 

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Good 25 min video overview going through the elements of a trading system/strategy from Tradeciety.

 

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Starting to get quite a bit of stuff on here so probably be useful to slot in an overview as to what is the point.

So most people who start trading lose, well known fact, but why? It's because they don't have a FOP of course.

People enter trading like they would enter a casino, they decide they are going to 'have a go' and 'try their luck', they swot up on how to play Blackjack or what ever, the statistical and technical analysis, walk into the casino, sit down at the table, and guess what, they don't know it yet but they have already lost.

The mindset is just all wrong, the fact is you are not walking into a casino you are walking into a market via a brokerage doorway.

If you are walking in with the mindset of a punter or a gambler it's bad news not just for you but for the broker as well because you are just going to blow your account in short order and then leave, just like most punters at a casino. The small amount of commission made by the broker on your pitifully short career was probably hardly worth signing you up for.

Now this has been said before many times for many years, but needs constant repeating, you need to develop the mindset of the casino not the punter. What's the difference? A casino operates with a FIXED ODDS PLAYBOOK and you need to do the same. The casino doesn't care who walks in or how well they might do because the casino knows that over time they will come out on top. You can't walk into a casino and play just any game, you must play their game.

So what's your game, your playbook? Whereby you will sit down at the chart and watch price bounce around all over the place, plenty of chances to make money but you're not interested, will not be lured until you see one of your setups from your tried and tested playbook develop, you execute as per your playbook rules and the trade is over and you can sit back and wait for the next one.

It's obviously better to develop and test your FOP before you sit down at the table but it's never too late and that's the point of the thread, how to make a playbook and how to test it so you know exactly what the odds are before you play.

 

 

 

 

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@Caseynotes,

Yes. Finally someone has hit the nail on the head here on the IG Community. 

There is a tendency for a lot of traders to want to trade frequently without even assessing whether the conditions are appropriate or not. They have decided that they want to make say £200 per day trading so they are going to trade 'something' regardless just to try and make their monetary target. 

The 'trading conditions' need to be right. The appropriate signals and indicators needs to have been triggered. For those who look at fundamentals as well they need to be in tune with the price action and support it so that it is clear why the price is moving the way it is and the possible reasons behind it. 

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Interesting series (unfinished) on 'Learning to Trade' from Trading psychologist Brett Steenbarger. So far just the intro and parts 1&2 of 3 but thought to add as it's good weekend reading. More about the trading auction than trading psychology and so something for everyone. 

Intro

"After having gone undercover lately and signed up for a number of trading services, I'm left shaking my head.  The great bulk of what passes for mentoring and trader education is amazingly simplistic and non-original.  To varying degrees, the services exhort would-be market wizards to follow the lead of the mentor/guru/teacher and enter into a world of ongoing profitability, with all the associated desirable benefits.  The entire experience of tasting the world of the trading beginner reminds me of Andy Huang's doll, who pursues an ever-receding glamorous future, only to find the whole thing an illusion." 

Read on -

https://traderfeed.blogspot.com/2019/10/getting-past-trading-illusions.html

 

Part 1

"This series of short posts will describe the process by which I am teaching myself a new form of trading.  The idea is to illustrate a learning process and concepts that I have found important in trading.  Eventually I'll post actual trades and how these become part of the ongoing learning process.  Given the unusual interest in the recent post on what is missing in much of the trading education world, my hope is that this blog can provide a realistic, hype-free alternative."

Read on -

https://traderfeed.blogspot.com/2019/10/learning-to-trade-1-building.html



Part 2

" In the first post in this series regarding learning to trade, we explored a foundation that enables us to see three things:  1)  who is in the market; 2) what they are doing; and 3) the prices at which they are doing it.  The goal is to achieve an understanding of the market's auction process, tracking the actions of buyers and sellers and their ability to move markets to new levels of value."

Read on -

http://traderfeed.blogspot.com/2019/10/learning-to-trade-2-understanding.html

   

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recently someone on the forum asked where are all the old posters? The answer is of course told in the line on the web pages '74% clients lose money' so why is that?
1/ Most people come into this thinking it's a game, like a casino, you learn the rules, play the game and maybe you're a natural and it all just takes off, ha ha. Would you start a new career with that mind set, no.
2/ Then you think 'Technical Analysis' must be the formula to success, you study hard and swamp your chart with TA but to no avail. TA is a science, trading is an art, they are not the same thing, to be good at one does not equal being good at the other.
By now you've invested so much money and time (money) that you can't turn round and without any outside income you run your account out, with additional funds you can go on down the same road indefinitely, surely if you can just keep going you'll get there eventually? no.
The video below looks at the reality of trading using math, it reiterates that most successful traders who stay in the game usually have a very simple methodology, many just use a simple ma crossover or price crossing an ma strategy - really. 
In the last few seconds of the video is a phrase that sums up what you need to do to make this work. Find it. Validate it. Do it.
Find it; 
a simple system that suits your style of trading (see the OP of this thread), copy or adapt one (there are hundreds out there), or develop your own from scratch.
Validate it; 
test it to make sure it works for you, collect data, backtest it, demo test it, live test it on min bet size (see the OP on testing).
Do it; 
Stick to the system's rules and the rules need to be hard and fixed, not just platitudes. If you change anything you must go back to the validation stage, otherwise stick to the rules and let it play out over time and many trades.
The 'find it' and 'validate it' stages cost time but not your savings account. If you get that right before going for real you are half way there which is further than the average punter gets. The 'do it' should be the easy bit but it's not, sticking to the rules is really hard, which is why many traders just use a simple strategy, because it's much easier to stick to.
Once you have done all of the above you are ready to start trading for real, most only discover this after their account has already hit zero.

 

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