It is stupid to fight a battle that you cannot win, and you cannot win unless you have properly planned for it. - Sun Tzu, The Art of War

We always hear “plan your trades and trade your plan” and I can’t stress enough the importance of trading plans for aspiring traders. I hate to say this but aspiring traders without a trading plan is almost doomed for failure.

Not only developing a sound trading plan has its challenges, maintaining it and using it effectively too. So I like to suggest a couple of practical tips for keep that trading plan alive!

Easily Accessible

If you got your trading plan on paper or on in an digital form (eg, Microsoft word  document) on your desktop or in a thumbdrive, do you find yourself not being able refer to or update it as and when the need arises?

I suggest using online word processors such as Google Docs  or Zoho Writer for your trading plan. Especially now we are trading online mostly, it is almost certain that we can have access or update our trading plans when we are trading.

Version Control

We tend to update our trading plans frequently. Can you imagine if we are using paper, we got to re-print it frequently? Or some may just jot down points on their trading plans that may be overlooked. If your trading plan is in digital format, you may have the worry about losing your changes after you have saved the documents (unless you are using Microsoft Word and you have turned on the version control function). All these problems are resolved if you used online word processors. For instance, Google Docs can track the changes that you have made to your trading plan and you can always revert the changes if the need arises.

Read Through It Every Morning Before Starting to Trade

Our trading plans would definitely grow in length as we progress in our trading. We definitely cannot memorize everything by heart. Reading through it every morning not only refreshes your memory but also helps to reinforce that those are rules that are meant to be followed strictly!

Be Ready Jot Down Things To Try Out or Take Notes

Especially pertaining to the strategy. Perhaps you noticed a recurring pattern in the market which you will backtest later during your free time. It is good to jot it down or risk the danger of missing out a good opportunity to refine your strategy!

Contents To Start With

For aspiring traders, try not to craft THE perfect trading plan before we begin to trade. The trading plan will evolved and be revised anyway. I propose the following rules minimally for a start:

• What to trade? - just USD/JPY or both USD/JPY and EUR/USD?
• When to trade? - please consider and merge the trading routine into your current lifestyle for this one. Some don’t find monitoring 5 min charts while they are on their full time job acceptable.
• How to trade? - detail description of your strategies. Entry and exit points. Determining of stop loss and profit target levels (and how to adjust them, if applicable).
• Money Management - how much to risk per trade? Maximum amount to risk based on total capital? This will also tell you how many lots to use per trade.
• Psychology - jot down the state of mind we should be when trading (eg, I will not chase the market, I will not trade after a quarrel etc). Add to this list whenever you are not “behaving right”

There you have it - a first-cut trading plan!

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We have to take a step back and think about if this statement is possible at all.

Personally, I have forward tested more than 5 expert advisors in demo accounts. After some time, I decided on running the most promising one on a live account. Right after I set up everything, funded live account and leased the expert advisor and all, I saw reports from a very popular forum that people had suffered up to 80% losses in their accounts almost overnight…when the expert advisor was catching the correct tops and bottoms and making phenomenal profits for the last few months or so. This has really shaken my belief about expert advisors.

Kathy Lien mentioned at one of her seminars that she used to work in big banks and she revealed that banks are spending millions of dollars to find the “switch”.  A “switch” that will allow their sophistically developed trading software to switch between trend trading strategies and range trading strategies as the markets alternate between the two states.

William Boatright (2nd runner-up in Autmoated Trading Championships 2007), mentioned in an interview with expert advisor reviewer, ck, that when he tried to optimize his expert advisor for trading trends, it would not perform as well for trading ranges and vice versa.

Another clue would be…have you ever wondered why there are so many discussions and forums on the Internet actively engaging to find THE expert advisor? And those people have been evaluating experts advisors after expert advisors for so many years already…

Having said that, I still believe it is still possible to achieve consistent profits with expert advisors. Below are the 3 essential steps on how to do it:

1. Still be able to do market analysis manually - pull out your indicators, watch the supports and resistances and the candlestick patterns…you must be able to tell if the market is trending or ranging in the first place.
2. Understand how the expert advisor works - for 2 reasons. Firstly, so that you know when you can deploy the expert advisor (remember, they don’t work in all conditions). Secondly, so that you can intervene when necessary. That is, you would want to close all the positions earlier (be it in profit or losses) when the market is entering a stage which the expert advisor will not perform well. I termed this “cyborg trading” - half man, half machine
3. Optimize the expert advisor regularly - another reason for knowing your expert advisor well. Expert advisors usually come with a set of programmable parameters which is configurable, depending on market conditions, to let the expert advisor be able to perform at its best (but still, it is either best for trending or best for ranging, no one set of parameters for both).

For me, I am taking a break from expert advisors, for now…

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Every one of us keeps a trade journal (or some call it trading diary), or it is highly recommended that we should keep a trade journal Most trading books and websites that teach trading talks about keeping a trade journal. Trade journals serve the following purpose:

• If we keep the screen captures of your charts, we can review and refine your entries and exits (especially after a string of losses). If we record what we are thinking when we place those trades, we can even review our psychology or mentality when placing the trades.
• Allow us track and keep records of our weekly, monthly or yearly performance and results, especially by specific trading strategies or trading systems. A good way to access the profitability of a trading strategy or system is by its expectancy. You can read about this and also about various methods of position sizing from Dr Van Tharp’s book”Trade Your Way to Financial Freedom”. These useful data are not provided out-of-the-box from our brokerage account statements or history and hence, can only be derived from our journal.

Most trade journals keep track of information such as entry time, entry price, exit time, exit price, lot size etc. Now, may I introduce 2 other useful parameters which I feel should be included in trade journals especially for aspiring traders!

Keeping track of our discipline

In a seminar, Ray Barros introduced his 3-1-0 method of journal keeping. In a nutshell, It is a means to quantitatively access at the end of each month if we have been following our trading plan religiously.

We can use any system for this. For instance, I can grade myself a ‘A’ if I followed my trading plan exactly for a particular trade. ‘B’ if I did not follow my trading plan completely. ‘C’ if I did not follow my trading plan at all. The idea is to get as many ‘A’s as possible every month!

Tracking our profit potential

Next, we also need a way to quantify how well did we perform for a particular trade. I got this idea from Dr Alexandra Elder’s books. He used a A-B-C system to grade how well did he capture profits in a trading channel or Bollinger Band.

So what I did was, I will give myself a ‘A’ if I capture more profits that what I should get. “Capturing more profits” may mean I took an entry at a better price or I used trailing stops to capture more profits etc. Basically, I got more profits than what I could as per my trading plan.I will give myself a ‘B’ if I got the amount as stipulated in my trading plan. A ‘C’ if I got lesser than expected. ‘A’s and ‘B’s are fine but I will need to do some self-reflection if my percentage of ‘C’s is increasing as the months go by.

With a more quantitative method of trade journaling, we could, besides just tracking our performance, have a gauge to access our discipline and move nearer to a having a trader’s psychology!

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I don’t trade consistently

We have to. We need practice and we also need the results to show if a strategy is working for us. For instance, only if we are consistently profiting monthly, then we should move to live trading. Ray Barros only considers a trader successful, if and only if, he/she has 3 years of consecutive profits. A strategy isn’t working if it were working for 1-2 weeks. It has to be working for months, for years and for life.

Can’t find time to trade? Then you may want to consider trading a different timeframe…

I don’t do back test

Then we have to wait longer before we are confident and comfortable with our strategies. I can complete back-testing  for 1 year worth of data in a few days. If we don’t backtest, we will need to wait for 1 year before achieving the same effect.

I am looking for the ultimate strategy

Then we will be kept very busy. Do you use indicators? Will you try to find the ultimate indicator? Some people use more than 4 indicators to “confirm with each other”. Which combination is the best? Not to forgot, we’ve got to do backtesting and forward testing to see if our strategy is the best. All these takes time.

But…do you know many successful traders don’t have strategies with high success rates? 40%, 50%, perhaps the best is 60%. You can find out more at traderinterviews.com.

I look at more than 1 instrument and more than 1 timeframe

Confusion, confusion, confusion. I am aware that some successful traders do look at more than 1 type of instrument. Eg, some play both futures and stocks. For aspiring traders, I recommend to just stick to 1 instrument and 1 timeframe at a time. There are many things to grapple with already.

I want to finish reading the trading books first

There are thousand and one trading books. After the books, there are tons and tons of knowledge on the internet. It will take donkey years before one can really “finish” reading everything. Furthermore, theory is very different from actual trading.

So…there are many ways we can waste time in trading. Beware.

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This is especially useful if you are trading smaller timeframes like the 1h, 30 min, 15 min and 5 min timeframes. You may find yourself having to check the charts so periodically until it is affecting your normal lifestyle? Something like, you even think thrice when you need to go the washroom urgently? Because the setup that you are waiting for the last few hours may be formed soon? Keeping our eyes glued to the screen also has another disadvantage. We may start to “see things” and see patterns that doesn’t exist!

The answer to our problem will be audio price alerts! We only check our charts when the alarm goes off! This will free us to do other things, like doing things in another part of the house or web surfing or even writing blogs

For those of you who are fortunate to have MT4 with you every minute while you are trading, you are fortunate. MT4 provides audio price alert out of the box! I have demonstrated how to set audio price alerts in MT4 in an earlier post.

Allow me to propose a solution for those whose trading platforms don’t come with audio price alerts as well as those who need a pure online solution (it took me a while to find it!)

2 useful websites which I found for this purpose are:

• Forex Price Alert
• AlertFX

Let me demonstrate how this works with Forex Price Alert.

First, click the “Sign up” menu link to register for an account.

After signing up, you can login, click the “Alert Services” menu link and you will see the following screen.

At that page, you can select the currency pair and enter the price that you wish to be alerted of. For the email field, enter the email address that the alert will be sent to.

Hey wait! You thought I said audio price alert right?

Yes, things are more straightforward if your mobile phone line provider supports email-to-SMS feature. For the more popular US carriers, check here. If you are using Starhub, here are the instructions for receiving SMS from email.

There is a workaround for a fully online solution. I signed up for an email account with AOL. Under the general settings for AOL webmail, we can choose to “Play a sound when new mail arrives”.

Got it?

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