1.
Money Management and Rules for Trading
Before achieving success in the markets, traders
need to learn how to protect their capital first.
Stop-Loss Orders: Always implement stop-loss
orders to limit potential losses.
Risk-to-reward: Deciding when to take your profit is
a crucial part of successful trading. Will you exit the
whole position when reaching a fixed risk-to-reward
ratio, take partial profits at discretionary levels, or
trail a small portion for a big home run? In all cases,
your RRR (risk-to-reward ratio) should be aligned
with the win rate that you determined from
backtesting.
Risk per Trade: Define the percentage of capital to
risk on each trade.
Daily Goal and Maximum Daily Drawdown: Set
daily profit targets and loss limits.
Maximum Drawdown: Define a maximum loss
threshold that triggers a reassessment of your
strategy.
2. Develop a Routine
Market Analysis: Conduct regular market analysis
based on your trading style.
Trade Journaling: Document all trades, including
rationale, entry/exit points, and outcomes.
Performance Review: Periodically review your
trading performance to identify areas for
improvement.
3. Continual Learning and Improvement
Education: Stay updated with market trends, new
strategies, and trading tools.
Review and Adjust: Regularly refine your strategy
based on performance reviews and changing market
conditions.
Optimization: Identify and integrate methods for
improving various aspects of trading.
4. Psychohygiene
Maintaining mental and emotional well-being
is crucial for sustained success in trading.
Trading is often extremely immersive, but it is of
utmost importance to keep a distance. Omitting
these aspects can lead to burnout, poor decision-
making, and ultimately hinder your trading
performance.
Regular Exercise: Engage in physical activities of
your choice. Exercise helps to reduce stress and
improves focus.
Start your day with a 30-minute jog or a
morning yoga session to clear your mind
before you begin trading.
Breaks and Off-Chart Time: Schedule regular
breaks during your trading day to prevent burnout
and maintain sharp decision-making skills.
Take a 10-minute break every hour to stretch,
walk around, or meditate. This can help you
reset and avoid fatigue.
Hobbies and Leisure Activities: Spend time on
hobbies and activities you enjoy outside of trading.
This provides a healthy distraction and keeps you
mentally fresh.
Dedicate time in the evening to reading,
painting, or playing a musical instrument to
unwind and detach from the trading
environment.
Social Interaction: Maintain a healthy social life by
spending time with family and friends. Socializing
can provide emotional support and reduce stress.
Plan weekly meet-ups with friends or family
dinners to ensure you have a support system
and time to relax.
Mindfulness or Meditation: Utilize these
techniques to improve concentration and emotional
regulation.
Incorporate a 10-minute meditation session
into your daily routine to enhance your focus
and reduce anxiety.
Healthy Sleep Routine: Ensure you get adequate
sleep each night to maintain optimal cognitive
function and emotional stability.
Establish a consistent sleep schedule, aiming
for 7-8 hours of sleep per night.
Diet and Nutrition: Follow a balanced diet to
support overall health and energy levels throughout
the day.
Incorporate nutritious meals and snacks, such
as fruits, vegetables, and whole grains, to
maintain steady energy and focus.
By incorporating these Psychohygiene practices into your routine, you can
maintain a healthy work-life balance, reduce stress, and improve your
overall trading performance.
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Example of a Simple Trading Plan
Goal
Achieve a 15% annual return with a maximum drawdown
of 10% of initial capital.
Target an average monthly return of +1.25%.
Revise the plan if a 10% drawdown is reached.
Expectations, Constrictions and Weekly Goals
The method below wasn’t backtested and it serves for
illustrative purposes. It would likely be better to anticipate
a lower win rate while allowing profits to run by trailing the
trending market.
However, let’s suppose that our method has a 50% win
rate with a fixed RRR of 2:1.
While risking 0.5% of capital on each trade, the monthly
plan would be reached with less than 2 good trades.
However, with a 50% win rate, there is almost a certainty
that you can experience a series of losses, such as 6
losses in a row. Be sure to account for that possibility.
Since our trading strategy doesn’t provide an excessive
number of signals, we do not need measures to prevent
overtrading. Instead, we trade every situation that fits the
defined conditions. There will be good months and bad
months, but that is just part of the process.
Market and Instruments
Trade one major forex pair: EUR/USD.
Example Strategy Description
The idea of this strategy is to enter a trending market during a pullback
move against its direction on a lower timeframe, while speculating that
key market structure levels will hold and the market direction will realign
with the stream of the higher timeframe trend.
Entry Criteria:
On a 1-week timeframe
Price action is trending.
Waiting for the break of a significant low.
On a 1-day timeframe
Price action is generally following the trend
of 1W.
Waiting for a price to pull back to a SR
zone, enter there and bet on the
continuation of the trend.
The position always follows the direction of the 1W
trend.
Position Sizing: Risk 0.5% of total capital on each trade.
Entry Setup: Set a limit order in the middle of the
predefined support / resistance zone.
Exit Criteria:
Stop Loss Order: At the previous significant
swing high/low on 1D chart
Take Profit Order: Upon reaching a profit target
of 2:1 reward-to-risk ratio.
Routine
Pre-Market Preparation: The trading strategy doesn’t
need much attention.
1W: Friday evening, Sunday evening, or Monday
morning: update the weekly chart by assessing the
trend and highlighting significant levels that
invalidate it or confirm its continuation.
1D: Around the end of market hours each day,
assess the trend on the daily chart or perform daily
technical analysis during the evening.
Execution: Set a limit order at the defined level if all the
conditions align.
Journaling: Record all trades in a spreadsheet, noting
reasons for entry and exit, and outcomes. Always keep a
screenshot of the situation.
Testing
Backtesting: Test the strategy on the last 5 years of
historical data or until having at least 100 situations
analyzed.
Paper Trading: Implement the strategy in a demo
account for 3 months.
Conclusion
Building a trading plan involves understanding your motivations, defining
clear goals, choosing the right market and instruments, developing a
robust strategy, and managing risk effectively. Regular analysis,
disciplined execution, and continual learning are key to long-term
success.
