So what's the trading plan?

So what's the trading plan? This was a question I was asked yesterday on eToro (my username on the platform is simongforex).

I decided to post details of my challenge on this social trading platform to gauge what the response would be. Wow, is all I can say – after posting a small synopsis on the site my phone didn't stop pinging for the rest of the day with people adding me to their watchlists and asking questions.

It seems the desire to make money is common among the masses and my manifesto hit a spot!

I've only been on eToro for a couple of months and am still getting to grips with the platform. There's less bells and whistles than my usual broker, which makes trading a little difficult. For example, when trading forex there isn't currently an option to take off partial positions, which is something I do in order to take incremental profits.

A method to take incremental profits is something I purposefully built into my strategy. Through an exercise of self-reflection I realised that I was right more often than not on the short-term direction of any given currency pair, but that taking profits was a challenge – I was always looking to hit the home run, and subsequently was often stopped out even though (at least for a time) I'd held a winning position.

Before I dive into answering the question, it's important to understand why when trading forex (or any other financial instrument for that matter) you need a strategy.

Why you need a trading strategy / plan >

In a nutshell, without a strategy you're at the whim of the market and your emotions in your assessment of the market at any particular time. You might buy or sell a particular currency pair, because you feel the time is right to do so, and rationalise your reason or reasons for entering the market at that time. This 'trading on a whim' offers no consistency – without a strategy you are free to do what you feel. In addition, comparing one trade to another, as part of your post-trade analysis becomes impossible.

You need a framework in place, which governs how you see the market at at any given point and has strict rules in place on how you will interact with it. The currency markets operate on the actions and reactions of a whole host of players, ranging from large central banks to the individual trader sat at home on his or her laptop (yours truly is included in the latter). It's impossible to know or understand all of these variables and with a whole host of trading tools at your disposal on even the most basic of charting packages you have to sort the wheat from the chaff, or risk paying the cost of confusion.

What your 'wheat' is – i.e. what you choose to focus on is entirely up to you. Once you decide on this and engage with the market the same way each and every time in line with your strategy, you'll gain an understanding of the winning probability associated with your approach. Through feedback from the market (by trading your strategy on a live account in real time) and careful analysis, you then fine-tune your approach to improve its performance.

This is very different to the approach taken by many retail traders, who:

1. Have no strategy and trade on a whim, or adopt someone else's strategy as their own.
2. Continually chop and change their approach to find the trading strategy that works – with all of the educators out there, there's no shortage of choice. 

This dooms them to failure – they don't own their strategy, so how can they ever understand it? What's more, they don't understand that it's not actually the strategy that's important – what's much more important is that you have one and trade it consistently to understand its probabilities.

There is no Holy Grail in forex trading – there is no system that wins all of the time. There is no certainty, only probabilities; and to be a successful trader you have to own these probabilities, which means you have to own your own strategy.

I've made all of the mistakes in the book and at the outset of my trading career fell for the promises of the educators and the spin that told me finally 'this' was the system. I changed system regularly and the results were always the same – frustration, despondency and eroded capital.

It wasn't until I happened upon an article in one of the forex publications, which interviewed a former pit trader by the name of Jason Jankovsky that my approach to trading changed. I did Jason's Psychology Of Trading Course, which had very little to do with the markets, and instead, everything to do with me. Once I ditched my search for the perfect system and opened my mind to Jason's method the way became clear – I couldn't control the market, the only thing I could control was me.

As far as I'm aware, unfortunately Jason doesn't teach his course anymore, but you can find a number of his excellent books online at Amazon, which are well worth reading.

My trading strategy / plan >

So with that all said, back to the question I was presented with yesterday: 'What's the trading plan?'

Well in summary, I keep things very simple. As Leonardo da Vinci once said – 'simplicity is the ultimate sophistication'.

I consider three time frames – weekly, daily and 4 hours.

I analyse price in relation to the 200 and 50 SMAs (Simple Moving Averages) on each time frame to help me determine the overall direction of the market. Whether it's trending or in range.

For trending markets (price is making a series of higher highs or lower lows) I use a simple moving average crossover signal to get in, which forms my TREND strategy. If a trend is already underway and all SMAs are telling the same story I have what I call my FULL HOUSE strategy to enter the trend once it's begun (the entry signal here is determined by specific candle signals I have programmed into my charting package).

For ranging markets (price is locked between two extremes and bounces back and forth) I enter at the extreme of the range using my RANGE strategy. I also have what I call my GOLDEN GATE strategy, which is an entry signal in the middle of the range once certain SMAs have been breached.

I don't use any indicators on my charts – no MACD, RSI, or similar. These indicators are just a derivative of price, so why not just focus on price itself? My moving averages and price action tell me all I need to know to trade my approach.

My TREND, FULL HOUSE, RANGE and GOLDEN GATE strategy parameters highlight a potential opportunity and then I consider risk and reward, stop placement and correlation risk, which must also support my decision to enter a trade.

Getting in is often the easy part, with knowing when to get out being much more difficult. I have a strict set of rules for partial exit and ultimate exit of my individual trades, in addition to rules for adding to a winning proposition along the way.

These rules are set in stone and are never compromised – this is the mechanical element of my trading.

There is also an artistic element in terms of trade selection – I don't trade every signal, but select the very best opportunities. I do this by trusting my subconscious (the product of my years of experience in the market) – sometimes an opportunity just doesn't look right, or one opportunity looks better than another. This is where discretion is helpful in my trading approach, which is built on a very mechanical system based on my understanding of market dynamics and how I choose to interpret them.

Crikey – that all got a bit heavy didn't it? I'm conscious too that despite me advocating a simple approach the above may actually sound quite complex. It's actually a very simple system that I know inside out and will be explaining in more detail on my YouTube channel when the 36-month challenge goes live. In preparation for this, you can subscribe and hit the notification button here if you'd like to be kept in the loop.

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Is it really possible to turn £50K into £1M? Over the next 36 months I'm going to find out by trading my personal account with full transparency.
Follow my 36-month challenge to turn £50K into £1M.
Read my blog here: https://stgforextvforexchallenge.blogspot.com
Subscribe on YouTube here: https://www.youtube.com/channel/UCyGySJ5IeDjq-DIJPU7nYvw

[Please note, the information presented is general educational material and does not constitute trading advice.
Trading foreign exchange (forex) on margin carries a high level of risk and may not be suitable for you or your circumstances.
Before trading forex you should investigate all of the risks, including the possibility that you could lose more than your initial investment.
It’s important to consider your investment objectives, level of experience and risk appetite. If in doubt seek advice from an independent financial advisor.]