FOREX TRADE MANAGEMENT
Trade management is one of the most important factors in success when it comes to trading Forex. Many traders ignore this vital aspect of Forex trading to their detriment. Sound trade management helps to remove emotion from the equation. Letting your emotions have a say in your trading can lead to kneejerk reactions. Strong discipline is required to set a sensible stop-loss and even more discipline is required to keep from moving those stop-losses. Moving your stop-loss in a vain attempt to recover pips that were lost is a recipe for disaster.
When you enter a trade, follow your plan and stick to it. If you don’t do this, the temptation will be far too great to tweak this or that element of your trade in order to keep it going. Be strict with yourself and make only those trades that meet your preset requirements. If a trade goes bad to the point where your plan says to get out, then get out! Determining the entry point is the easy part. Figuring out when you should get out is the key part that will make you a winner or a loser. Without a trading plan, you are like a sailboat on the ocean, where the winds of emotion will blow you to and fro and crash your vessel against the reef of emotional trading.
Putting Together a Trading Plan
You may think that you can get by trading on your “gut,” but think again. When you are facing down a huge reversal and the market is doing something that’s the total opposite of what you expected, not only is your money on the line, but so is your ego. You will want to rescue not only your money, but you’ll want to double down on your trade and prove you’re right even more. Make a plan beforehand and stick to it—Keep your emotions out of it!
Some elements of your trade management plan should include:
- Criteria for entering a trade—where and when to enter the market.
- How many positions will you take? Will you enter one trade and hold it until your target is met? Or will you have multiple targets and scale out more of your position at each target?
- What stop loss to set for the trade? At what point to give up on the trade?
A trading plan like this allows you to trade in a consistent way. If you expect to have consistent results, it makes sense that you will need to trade in a consistent and repeatable manner. This does not mean that you should trade the same way in every market and under every market condition. Your trading plan should fit the market and the particular dynamics of the market at that point in time. It should only use strategies that are suited to that market situation. Don’t use ranging strategies in a trending market or vice versa, just for the sake of consistency.
A Simple Example of a Trade Management Plan
To give you an example of how a trading plan could be put together, consider a ranging market. This is a very simplistic strategy for the purposes to illustrating a trading plan.
- Wait for a free candle above the top Keltner channel / a free candle below the bottom Keltner channel (That is, a candle that is completely above the top, or below the bottom of the channel).
- Enter a trade when the candle closes under the top Keltner channel / above the bottom Keltner channel.
- Set the stop loss at the extreme set by the free candle in step 1.
- Set the take-profit point at the lower Keltner channel / upper Keltner channel.
This strictly defined trading plan locks you in and takes your emotions out of the trade. It will either work or it won’t. This fact allows you to sit back and detach oneself emotionally from this single trade.
Keep Records of Your Trades
Keeping meticulous records of your trades is a surefire way to improve your trading skills and to ensure that you operate your trading in a consistent manner. Things you should track in your trading record include: Time of trade, size and number of the positions, entry and exit points (multiple entry and exit points if scaling your position in and out), time you closed all positions, and the profit/loss of the trade. You can refer back to these records to see how you have done. Analyzing your performance will give you data and motivation you need to improve upon it.
Good Money Management Enhances Good Trade Management
If you also have a good money management plan, you will not risk more capital in a single trade than you can lose, a fact which will also help one detach him or herself from a single trade.
With good money management, a single trade is not overly significant in the overall money management strategy. One can appreciate that profits are made over the long haul and not on a single trade. This may not seem to be a very romantic or exciting way to make money, but many Forex traders find it to be effective.
Forex trading and indeed any kind of trading is a thinker’s game. When you let your ego or wallet get involved, fear and pride become your trading partners, and this is risky business. Always have a sound trading plan. Don’t deviate from your trading plan in the middle of a trade. If your trading plan needs work, work on it when there is no money on the table. Keep records of your trades so that you can go back and analyze your performance.