As a spread trader, you understand that your core business in this context is trading.  This means that you will need to develop a trading plan to base your business on.   Save yourself time, money and stress by creating a blueprint of all the possibilities that can arise in trading, before you place a trade. Money is a powerful force, and you will need to create strategies to smooth out the emotional rollercoaster that trading can take you on.

Choose overall rules to build your trading plan. Follow them to increase the probability of making money.

• Know what you can realistically expect.
• Let the market dictate your trading – you can’t dictate the market.
• Choose a trading plan premise that you believe in.
• Choose rules that fit your personality and lifestyle.
• You can’t follow all the rules all the time, or you would never make a trade.
• Some rules could also be called tactics.
• Keep it simple.
• Follow your rules.
• Manage your trading capital.
• Diversify your capital to reduce risk.

Learning from successful traders

Following trading experts is the fastest way to develop expertise in your own trading.

• Observe several successful traders.
• What actions and strategies do they have in common?
• What resources do they have?
• Who did they emulate and why?
• What are their most important lessons?
• How do they think and how do they communicate their beliefs and values?
• Mimic those qualities which will improve your trading ability.

Developing signals

When developing a signal it has to be based on a valid premise or theory about the market – such as the mechanics of how the markets work and an awareness of the psychological implications of certain patterns and indicators. You need to feel comfortable with the rules you choose.

• Have rules.
• Follow your rules.
• Develop rules on one set of data and test on a different set of data.

Entering a trade

A good entry system defines an objective that is repeatable for entering the markets. Develop rules that you believe will give the best outcome over the long haul.

• Know the expected value of the trade and the risk.
• Wait for indicators to give you a signal.
• When you have a signal, take it.

Setting the stop loss

A stop loss level is a point where you will exit when a trade turns against you. The primary function of a stop is to have a predetermined mechanical point at which you exit a trade. It provides psychological control. Have rules that will protect you, but that will not take you out of trades prematurely.

• Always know what the stop will be before you place an entry order.
• Use trailing stops if they fit within the parameters of your method.
• Use time stops as well as price stops.

Exiting a trade

It has been said of trading that it is when you exit a trade that you make money, not when you enter. Generally, it is your exit that will determine whether
you make or lose money on a particular trade. Exits can be an art rather than a science.

• Know how and when to exit if it is not mechanical.
• Do not let winning trades turn into losing trades.
• Develop a strategy for re-entry if a trade exit is premature.

Monitoring your trading plan

It is important to know what is going on in each trade and to be in a state of mind to see opportunities and take them.

• Choose rules that will keep you alert and ready to make the best move.
• Have a predetermined rule that will ward off problems and seek out solutions before any major losses occur.
• Evaluate the signals within a time frame consistent with a trading time frame.

Evaluating your trading plan

As a way of evaluating your plan, your objective should be to find the most appropriate trading plan for your values, belief structure and financial situation. You will need a set of data which is used for developing your rules, a test set of data to see how your system should perform in the future, and an out of- sample set of data which is for further testing just in case of contamination.

• If you do not believe it will make money it won’t.
• If you believe it will make money, it does not mean it will.

Some questions you need to ask as you build your trading plan

 
Your trading goal

• Your reason for trading, e.g. trading as an income generator; you want to be a famous trader.

Your availability

• How much time can you devote to trading?
• Do you still have a full-time job?
• Are you interested in monitoring the market even outside of trading hours?

Markets to trade

• Will you be trading UK markets only?
• Will you trade FX pairs?
• Will you trade US markets?

Your trading capital

• How much trading capital do you have?
• Is this money you can afford to lose?
• Where will you get your initial trading capital – is this your savings or are you borrowing to trade?
• How much profit do you expect to make from trading?

Risk management

• How much would you like to risk per trade?
• What would you do if you have a series of losses at the start?

Our trading set-up and tools

• What trading platform will you use?
• What hardware and software will you use?
• Will you be trading from home, the office or somewhere else?
•  How will you protect your trading data?

Courtesy of CMC Markets