Chapter 6: Beginner's Guide to Developing a Forex Trading Plan

Short Term Trading Example

From our examples above, the average candle movement on a 5 minute chart, is between 5 and 7 pips, so let’s take 10 pips. Our maximum loss that we are going to accept is therefor 2 x 10 or 20 pips. Our money management rule states that our maximum financial loss is $20.

The maths here is very simple. Our stop loss is going to be placed 20 pips away from our entry,  and we are prepared  to lose $20, so if we divide  the  dollar amount by the number of pips, this will tell us the $ per pip as follows:

$20/20 = $1 per pip

In other words, to meet all our criteria in placing this position in the market we could use 1 mini lot contract at $1 per pip.

We know from earlier chapters in the book that 1 mini lot is also equivalent to 10 micro lots, (1 micro lot = 10 cents per pip), and in this example this would be perfectly  acceptable.  All  the  rules  remain  fulfilled.  This  also  opens  up  an alternative approach which is to use a smaller number of micro lot contracts, as the rules in your trading plan are always the maximum. This does not mean you have to use the maximum on each position, but simply  defines the maximum allowable. There is nothing wrong with staying below the maximum, and using micro lots in this example does just that!

Suppose we only use 5 micro lot contracts in this example, so $0.50 cents  in other words, rather than $1. What options do we have now? Well several in fact as follows:

Increase the number of pips we are prepared to lose to 40 pips (40 x $0.50 =

$20)

Keep the number of pips we are prepared to lose at 20 pips, which reduces our financial loss to 1% (20 x $0.50 = $10)

Enter with 5 micro lot contracts initially with a 20 pip stop loss, and then add a further 5 micro lot contracts once the position moves in our favor. This would then equate to the original maths of 10 x $0.10 x 20 = $20

I hope from the above very simple example, you can begin to see that everything stems from the simple rules that underpin your trading plan. I am going to cover and explain stop loss management and positioning in due course, and as you will probably appreciate, this is an art and not a science. Nevertheless, the maths which underpins it is key, and I hope that in the example above, using a short term approach to the market, you can see that even when you have clearly defined your money management rules, you still have the flexibility within those rules to be ‘creative’ in your trading approach. This is what we call,  ‘position sizing’   which   simply   means   adjusting   your   position   to  fit   your   money management rules. There is no mystique and it is really very simple, once you appreciate that it is a ‘backwards process’ of starting with a financial value, and then applying  this to an equivalent  in pips, so that  your  rules always remain intact.

Also, let me make the point again. Whatever rule you have as your % at  risk, whether it is 1%, 2% or 5%, this is the maximum. It is not a target to be aimed for, but merely a level which must never be broken.

Medium Term Trading Example

If we take the same approach based on our hourly chart. And here let’s assume

25 pips is the average, so our maximum loss is 2 x 25 or 50 pips.

Once again, we are going to use the 2% rule for our money management, which is our $20 again, and as before we divide the pip value by our money value:

$20/50 = $0.40 per pip (40 cents per pip)

Now our rule set is dictating the contract size for us, and we cannot trade using a mini lot unlike our first example. In this case we can only enter positions in this time frame using micro lots, if we are to maintain our rules. Here the maximum number of contracts is four micro lots.

Once again though  we have some options.  Suppose  we halve the number  of contracts  again,  reducing  this  to  2  -  this  opens  up  the  following  possible alternatives:

Increase the number of pips we are prepared to lose to 100 pips (100 x

$0.20 = $20 )

Keep the number of pips we are prepared to lose at 50, which reduces our financial loss to 1% ( 50 x $0.20 = $10)

Enter with two micro lots initially and if the position moves in our direction then add the other two. This then equates to our original calculation of 4 x $0.10 x 50 = $20

Again, several options here, but the key point is this. In moving to a slower 

timeframe, and with the same amount of trading capital, we no longer have the option to trade using a mini lot, and are forced, by our rules, to use micro lots instead. If we did want to trade using a mini lot, then either our rules need to be changed, with an increase in percentage risk on our capital, or an increase in our trading capital.

Long Term Trading Example

Finally, let’s move to our long term example where we are proposing to take a position in the market using the daily chart.

From our example earlier, if we take 100 pips as the average and a factor of two, then our stop loss value in pips is 100 x 2 or 200 pips.

Taking our 2% money management rule again, this equates to $20 and if we then divide this by our number of pips, this gives the following:

$20/200 = $0.10 per pip (10 cents per pip)

What are our options now? The short answer is none. We are now at the extreme of our money management rule, trading the smallest contract size, a micro lot, on the longest timeframe, and there is no room for maneuver, other than to reduce the number of pips in our stop loss position (which we could do).

However, what I hope this last example has proved, is that even with a modest amount of trading capital in your account, and with very  conservative  money management  rules,  it is perfectly  feasible  to take  a  longer  term  approach  to trading, and still maintain that balance of risk and money management which is so crucial. It also goes to show, I hope, that  within each approach,  you have some additional flexibility in adjusting both the way any position is built in the market, as well as reducing your financial risk if you wish, provided your rules are never breached. The only example where this was not the case, was the last, where our rules dictated the absolute position we could take, no more no less.

How Do I Choose My Approach?

This is a big question to answer, and before I start trying to answer it, let me begin with some broad principles, which we can then consider in more detail.

There is no right or wrong way to trade - it is your way 

Short term trading is more stressful than longer term

Trading success as you start is about consistency, not money

Your  approach  will  be  based  on  many  factors,  such  as  time  available, personality, attitude to risk

First, there is no right or wrong way to trade in the forex market, despite what you may have been told or read elsewhere. I hope that in working  through the above examples first, it has proved to you that even if you only have a modest amount to start with, every approach is feasible.

The choice is yours, and one of the major influencing factors may well be  the time that you have available. One of the pieces of advice I always give to new traders,  is never give up any full time job, and the trick is to find  a  way to combine  your  job  and  your  trading,  which  is  why  I  took  so  much  time  in explaining  how you can trade the longer term timeframes,  even with a small trading account. Trading longer term positions allows you  to continue any full time employment, as you build up your trading experience. Longer term trading has many advantages and this is one of them - you do not need to sit in front of the screen, hour after hour. This is also why this approach is less stressful, since you are not exposing your emotions  to the market, of which, more in the next chapter!

Let’s take this in reverse order then, as I suspect that if you are relatively new to the world  of forex  trading,  then  this approach  may be the place  to  start  for several reasons:

It allows you to continue to hold down a full time job, whilst you start to learn and build up your knowledge. This way, you can have two streams of income, one from your job, and one from trading

It does not require you to be sitting in front of the screen for hours at a time It is the least stressful way to trade as you place your position and leave it to develop

You can trade all the pairs as spreads are of less concern in the overall profit and loss figures

By default you trade less, so your costs of trading are less (there is no such thing as a free lunch)

It allows you to take advantage of the most active periods of market price action, wherever you are in the world 

Let’s look at these one by one, and in this approach we are primarily focused on the daily and weekly chart timeframes, with a four hour chart, the ‘fastest timeframe’. Here we would be considering the four hour chart, basing our decision on the daily chart, and then considering the weekly chart for the longer term trend.

If you have a job - keep it! That’s my advice. You may have started forex trading as your route out of the daily grind, which is fine, but be patient. If you jump too early, you will put too much pressure on yourself to succeed. There is enough pressure just trading. You don’t need any more by having to trade in order to pay the bills, so don’t do it.

If you have read another of my books on Volume Price Analysis, you’ll know that I began my own trading career many years ago in London, following a two week course. What I do remember very clearly though, is several students calling their employers towards the end of the course, and resigning. This was madness in my view, and something I have always advised new traders, never to do, however desperate you are to leave and trade full time. Look on the positive side and consider your job and your current employer as merely supporting you, while you learn a new skill.

A longer term approach means you do not need to sit in front of your screen. After all, you have a position in the market which is fully protected, and you should only need to check this once or perhaps twice a day at most. The problem for many traders is simply that when they sit in front of a screen, they feel they must trade, and something called ‘over trading’ then becomes a real problem. In other words, trading for the sake of trading. The reason for this is simple to understand when you begin to think about it. After all, trading is now your job, and if you are sitting in your ‘office’ in front of your screen, then your brain will be telling you that you need to trade - you should be ‘doing something’. It is the hardest thing in the world to sit in front of a trading screen and do nothing. This is why the longer term approach, coupled with a job, works well. It saves you from this problem, since you are simply not there. You are at work, but learning nevertheless.

Now another issue is the cost of the trade, and despite what you have read, there is no such thing as a ‘free lunch’. Whilst every MT4 broker will offer you ‘free trading’, the costs are already built into the spread. Those currency pairs which are the most heavily traded such as the majors, will have relatively tight spreads of a few pips. However, some of the less heavily traded pairs will have much wider spreads, which make them almost impossible to trade on a short term scalping basis. After all, if the pair has an 8 pip spread, and you have a 15 or 20 pip stop loss, this is a massive percentage to be absorbing into a position. This is rather like running the 100m, but giving everyone else a 40m start.

On a long term strategy, this can be absorbed easily, since you are taking a longer term view and a stop loss of 200 pips plus. An 8 pip spread here is now very small in percentage terms.

As I have outlined above, you trade less by default, since you are out at work. This prevents you from falling into the ‘over trading’ trap.

Finally, one of the problems that many new forex traders face, is in accessing the markets when they are at their most active and liquid. For traders like myself who have the ‘double luxury’ of living in the Northern Hemisphere, as well as being able to be in front of a trading screen, this is easy. I have the best of everything. I can trade in the forex market at a sociable time, during the London open and into the US session, and I also get to sleep when the markets are relatively quiet in the Asian and overnight sessions.

For traders in other parts of the world this is not so easy. The London and US sessions may be in the middle of the night, and made even more difficult to access if you are out at work during your daytime hours and need to sleep - not unreasonable! This is where a longer term strategy can help, allowing you to take advantage of these active periods, as well as allowing you to lead a normal life as you start your own trading journey.

This is why I went to some lengths to explain that longer term trading is possible. I am not advocating it as the best way. It is one way which has many advantages, and particularly if you are just setting out on your own trading journey. It is one approach which you need to think about carefully, as it may be the one that helps you get started, with the least amount of risk.

Moving on to consider the medium term approach, the timeframes we would focus on here would be the 30 minute, the hour and the four hour charts, with perhaps the daily as our guide to the longer term trend. We may even move up to the 4 hour chart as our standard, with the 1 hour chart below, and the daily chart above.

Once again, this is an approach that can be tailored and adapted to suit work and family commitments. After all, two candles on a four hour chart are equivalent to the working day, and once again allow you to take advantage of the most liquid trading times, even if these are at unsociable times or at night. Trading in these slower time frames is relatively stress free. The intra day volatile price movements are absorbed into these longer term candles, removing much of the emotional pressure which can be damaging when you are constantly sitting in front of the screen.

Finally, we have the third approach - the very short term scalping approach, which is probably the most widely adopted by forex traders around the world. This is fine if you do not have a full time job, and can dedicate the time needed to sit in front of a screen for long periods of time. However, there are several issues you need to consider carefully in taking this approach and these are as follows:

• Time - you do need to be able to commit the time to spend in front of your screen
• It is very hard to combine this approach with a full time job
• Intraday trading can be much more stressful as you are watching positions move up and down minute by minute
• You will be restricted to those currency pairs with narrow spreads as the maths simply does not work otherwise
• Your timezone may be far from perfect to allow you to take advantage of the most active markets during European, London and US sessions
• There are higher costs of trading, as you will be a more active trader
• The issue of ‘over trading’ becomes a real problem

There are many other issues which you will need to consider carefully, and perhaps even discuss with your family as you get started. Your trading approach has to fit in with many things, not least your work/life commitments and this is something that you will have to think about, and judge for yourself. As I said at the start, there is no right or wrong way to trade. The right approach is that one that suits you, your commitments, your lifestyle and your personality.

Technical Or Fundamental?

Having decided on the broad approach you are proposing to take, the next questions you might ask yourself in developing your plan, are as follows:

• Am I going to be a technical trader?
• Am I going to be a fundamental trader?
• Am I going to adopt both approaches and bolt in relational in due course?

Once again, there is no right or wrong answer. As we saw when I introduced these approaches earlier in the book, they have very different underlying philosophies. The central tenet for a technical trader is that the price chart is everything. Within each price candle are the views of every investor, trader and speculator around the world. The price chart is the fulcrum of risk and market sentiment which is displayed second by second before moving on to the next phase of price action, whether on a tick chart or a monthly chart. The price also contains all the news which is absorbed and then reflected on the chart. In other words, the price chart contains and displays all the information about the currency pair in a simple and visual way. Any trading decision is then based on the chart using a variety of technical tools and techniques.

The fundamental approach is entirely different in concept and approach. Here, trading decisions are based on the ‘pure economics’ of the market. The underlying philosophy of the fundamental trader is that currency strength and weakness is determined by the ‘big picture’ data which reflects imports and exports, interest rate differentials, inflation and deflation, economic cycles, employment, housing, retail sales, manufacturing, and a whole host of other numbers, which determine whether a currency is in demand or not. For a fundamental trader, the technical picture is irrelevant, and they will only consider the chart when ready to trade, and as the mechanism by which they open a position. They do not believe in support and resistance, candlesticks, candle patterns, volume, or indeed any other technical indicator. Their analysis of the market is purely based on the economic picture, both at the macro and micro level.

Technical and fundamental traders never agree. Both maintain that theirs is the right approach, and the other is wrong, and here is where I step in.

By all means investigate both as you will need to understand both, and my advice is simple. If both approaches have value, why restrict yourself to one or the other - use both! And in my case, I use a third which is the relational element that I introduced earlier in the book.

My own trading has been based on a technical approach, ever since I first started all those years ago. However, I am the first to admit that I pay great attention to the fundamental aspects of broader economics, for many reasons, but for one in particular. Even if you decide ultimately that you are only going to trade using a technical approach, the fundamental news is always there. It dominates this market, and you only have to look at the economic calendar to appreciate why. Every day is full of economic releases, statements and news announcements from around the world, which will impact the price on release. Therefore, in a sense, you cannot avoid fundamental releases anyway, as one of the decisions you will have to factor into your trading plan is this. Do I trade ahead of the news, through the news, or wait until after the news has been released and the market has reacted accordingly?

In other words, the news is there whether we like it or not, and to simply ignore it would be foolish in the extreme. If this is the case, then even if you ultimately decide that your approach is purely technical, the fundamental will always have an impact, whether in the timing of your decision in opening any new position, or simply how it affects the price on the chart. You may decide, as many forex traders do, to ignore fundamental news completely, and simply consider the timing aspect. In other words, check the economic calendar on a daily basis, and note the times when the major releases are due. You can then simply avoid these completely, or manage positions closely during any release.

There are many free sites with good economic calendars which list all these for you and generally for weeks and months ahead. The site I use myself as you know is Forex factory, but there are others. The common theme with all these sites is that the news is ranked in terms of impact on the market. A red flag indicates an important item which will have a major impact, whilst orange and yellow releases have less significance. In addition you will also find a wealth of other information, including historical charts for the release, an explanation of the data, a forecast of the expected number, and links to any associated sites or statements.

If you do decide to pay closer attention to the economic news, then this is a big subject in itself, but worth the effort required to understand, what is, in every sense, the ‘big picture’.

In a short book, such as this, it is impossible to give you a detailed view of the fundamental approach, but let me try to build on some of the concepts I introduced in an earlier chapter, which I hope will at least lay the foundations for you. The approach that many novice forex traders take, which I believe is a common sense approach, is to start by learning the technical approach first, and then to build on this knowledge adding in the fundamentals. Economics, after all, is a subject in its own right, and we are not studying to become an economist, just that we have sufficient knowledge to understand why the market has reacted in the way it has, or perhaps how it is likely to react in the future.

Therefore, let me try to give you some broad concepts here, which I hope will help, and the first point is as follows.

No single item of economic news, no matter how important, is likely to reverse a longer term trend on its own. It will have an impact short term, and the market may reverse sharply on an intra day basis, but looking at the longer term trend, this is unlikely to change, unless the number is reinforcing a longer term change in the data itself. Let me explain.

Most forex traders will be aware of the monthly release in the US, the Non Farm Payroll. This is a number which always moves the markets, whether the number comes in above, below or at the market’s expectation.

Most forex traders will also simply look at the headline numbers in much the same way as the media, since this is a quick and easy way to absorb the information. However, as I mentioned earlier, when you start to look at an economic calendar, such as the one on the Forex Factory site, you will find an historic chart which details all the previous releases going back over the last 12 or 18 months.

If the chart shows a pattern, let’s say of rising unemployment, and the number is positive, with a fall, this alone will not trigger a major change in the longer term trend. It may be the first signal, but on its own, it will not be enough to see any longer term trend reverse. My point is this - always check how an economic number fits into the trend of the longer term. If the number confirms the trend, then it will continue. If it is ‘against’ the trend, then the market may pause and reverse in the short term, but the longer term trend will remain in place, if and until this data is confirmed, either in subsequent months, or by other associated news.

The second broad principle is this.

Economic data from one country will impact all currencies, particularly for major economic powers such as the USA, Japan and China. China is a classic example and every economic calendar now carries releases, since the economy of China is now so dominant, that any changes here are likely to have an immediate impact on global markets. Chinese data moves every market from equities to currencies, commodities and bonds, and perhaps even more so at present. With the markets generally very nervous following the financial collapse in 2007, any changes in Chinese data are seen as extremely significant, and are the ‘hair trigger’ on which markets focus at present. This will change over time, but is likely to remain a feature in the short term.

Third and last, and as I mentioned earlier in the book, economic data is cyclical in nature. In other words, at present, given the ultra low interest rate environment that exists in the world, these economic releases are far less significant, since this is a feature which is likely to remain in place for the next few years. This will change, but not just yet. As a result the markets tend to focus on those releases likely to signal expansion and growth for an economy.

This in turn will lead to changes in interest rates in due course, which in turn will then become significant once again. It is rather like the leader board in a game of golf, or the teams in a football league. Throughout the tournament or the year, teams or players will move up and down the rankings, sometimes they are at the top, and sometimes they move lower - it is the same with the ‘groups’ of economic data. The market focus will change, depending on where the global economy is in terms of expansion or contraction, and the associated inflationary pressures which will then be reflected in related markets.

Now you may be reading this and thinking this all sounds very complicated. After all, we are here to trade and not to be economists or market analysts, which is certainly true and is a very common feeling. There is a great deal to think about when you first start, and my advice here, is always the KISS principle - Keep It Super Simple.

With simplicity in mind, let me highlight what I believe are the first steps to take when thinking about developing your own approach to a trading plan. The plan is there to provide the foundations of your trading, and not the detail. I could even go one stage further and say that it is really there to define the money management aspects of your trading approach, and from which all else flows. After all, if this is not in place, then it is almost impossible to be precise in the other aspects of your plan.

Here then are the initial steps which you need to consider as you develop your trading plan:

Step One

Decide on the amount of your initial trading capital. This should be money you can afford to lose, and not be borrowed or loaned.

Step Two

Consider your family and financial commitments carefully and the time you may have available for trading. Think about the markets, the best times to trade and how this fits with your own personal work/life balance. If you have a job - keep it - your trading plan has to fit into your life, not the other way round. Look for the best fit, and adapt your trading approach accordingly.

Step Three

Which approach are you going to take? Purely technical, purely fundamental, or a mixture of both. Explore them both. Read and digest arguments from both sides, then make your own mind up. Relational comes later, much later, as your experience grows.

Step Four

Think about the advantages and disadvantages of various trading approaches. Your chosen approach may be dictated by your personal circumstances. If not, then consider the pros and cons of each, and in particular how each will suit you, your temperament and your personality. This is extremely important and needs careful thought and consideration. There is no right or wrong way to trade, just the way that suits you.

Step Five

Set yourself realistic, simple and achievable targets, which should be non- financial. Do not set monetary targets. Trading success is about two things primarily - consistency and money management. If you can be consistent over an extended period, then the money will flow. Being consistent is about the number of pips you make in a week or a month, not about how much money. Twenty pips a week may not sound very much, but at $10 per pip it’s $200 and at $100 per pip it’s $2,000 per week. Once you have a solid set of money management rules in place with your plan, then you are looking for consistency. From consistency comes money - it’s just a question of increasing your contract size on each trade.

Step Six

Define your money management rule depending on the amount of trading capital. The minimum is 1% and the maximum is 5%. The rule you set is the maximum - you do not have to use it on each position!

Step Seven

Based on your decision about your approach to the market, both in terms of timescales and technical, fundamental, or a combination, you now need to start thinking about how you are going to define an entry to the market. What is the trigger? How do you decide? What are the rules? Are there any rules or are you going to be a purely discretionary trader. All of these things you will need to consider and seek guidance. Again, there is no right or wrong answer here. There are many, many ways. You may decide that a piece of software is the correct way to start, or perhaps using one of the many technical indicators which are freely available?

I will give you my own view later in the book, as this is a huge topic in its own right. Many traders like to define hard and fast rules in their trading plan. In other words, I will do A if B happens. This could be very simple, or complex, but in essence it is a rule set that defines the entry. It will probably not surprise you to learn that this is not a route I advocate for many reasons, not least of which is that this is too prescribed. It verges on the mechanical, and the market is not a mechanical animal. If it were, then trading would be very easy.

If your entry is going to be discretionary, then that’s fine, but within your plan you just need to try to define what the parameters are that signal an entry or what’s often called a ‘set up’ for your new position. What you will probably discover is that your entry decision will be based on a combination of elements, perhaps, as in my case, volume, price action and a simple indicator.

Step Eight

Define your management and exit rules. This is another very grey area for novice traders, and I’m afraid one that non traders write about a great deal, and sadly write a great deal of nonsense. Again, I am going to cover this in much greater detail when we start putting everything together, and the reason I include it here is simple. You do need to say within your trading plan how you are going to manage any position, and what your exit is based on - if it is purely discretionary then that’s fine and no problem at all.

Many trading books at this point will suggest a simple risk reward relationship and once that has been met then you exit. This sounds very simple in theory, but that’s where it stops - in theory! The practical is very different. After all, why should the market give you 20 pips if you are prepared to risk 10. Or 30 pips, or whatever target you have in mind. The market does not work this way and never will, which is why you have to be discretional in your trading management and exit.

Let me explain with a simple example which combines the entry and the exit and uses the hammer candle, and the shooting star candle that we looked at in one of the early chapters.

Suppose  your  entry  rule  for  a  long  position  is  a  hammer  candle  and  the associated exit rule is a shooting star. The opposite would be a shooting star for a short position as your entry trigger, and a hammer candle for your exit rule. A very simple rule set, which can then be applied to your trading timeframe which might be a 5 minute chart, an hourly chart or a daily chart. That is your rule.

Do you follow  this rule blindly  and without  thought  on each  position?  Well possibly, but I doubt it very much.

What happens when your entry rule, a hammer for example, is then followed on the next candle by a shooting star. Do you exit immediately? Probably not, and the reason, is simple. You have only just entered the position and your mindset is still in ‘hope’.  You are hoping  for a profit  and not yet prepared  to consider exiting at a loss after such a short space of time, which is one  of the reasons these types of rules simply don’t work.

The corollary to this, is that you might say, well I will adjust the rule to say after X bars. In other words, if my exit candle appears within 1 or 2 candles from my entry,  then  I  will  ignore  it  under  my  rules.  Very  soon,  your  rules  become discretionary, or very complicated!

Let me give you another example which is a common rule that traders apply when trading in a market that has a physical exchange with an open and close - stocks for example or an index future. The rule here is generally something along the lines of: ‘never take a trade in the first ten minutes of the open’. This sounds very plausible. In other words, let the markets settle down before taking a position. But why 10 minutes, why not 9 or 11 or 15 minutes? And what happens when an opportunity appears after 9 minutes and your rule states that no position is to be taken before 10 minutes have elapsed. Do you wait? Do you take it? Is one minute important? This is what happens when you put these sorts of rules into a trading plan, which is why I have a problem with them, and I hope that you can start to see why!

I’m going to cover this in more detail later in the book for you, but this is perhaps the one area that is the most difficult for new traders. The only rules which are set in stone are your money management rules. Everything else is discretionary, they have to be. Traders who have trading plans which have no leeway will fail ultimately. The plan may work for a while, but market conditions then change, and the old rules no longer apply. It is rather like opening a shop and saying that today I want to make X. Well you may want to, but what if the weather is bad, the road is being dug up, it’s a Monday, or a shop close to you is having a sale? All these factors will play a part. Nothing stays the same day to day, and it’s the same with the markets. Every day is different, every day there are different forces at work, and to think that a mechanical plan will work consistently is somewhat naive.

Your plan needs to reflect this and needs to be practical. If you are going to take your signals after a break out from congestion, then say so. If you are going to do this in conjunction with a technical indicator, then say so. What your plan will not say is precisely when you are going to act. Equally, if you are going to exit when the market moves into a congestion phase, then say so in your plan and you will then need to explain how that congestion is defined on your chart. At least you then have a basis, a framework around which to work, and not some hard and fast rule set which is unworkable, inflexible, and probably much too complicated.

Don’t worry, if this doesn’t make sense right now, it will by the end of the book, but remember, I will be teaching you what I believe is the correct approach - you may disagree! But I hope I can convince you.

Step Nine

Then choose your broker with care - there are many good ones out there, but quite a few bad ones. Make sure you carry out due diligence before sending off your hard earned trading capital. I explain all about the good, the bad and the ugly of the trading world later in the book, as well as the various types of brokers and the questions to ask.

Step Ten

Execute your first trade with the minimum contract size available. I do not believe that paper trading in a demo account teaches anything of value, other than perhaps how to use the trading platform. In many cases the live and demo feeds are very different from one another, and any strategy you decide to test in a demo account simply will not work in a live account. Spreads may be very different and some orders may simply not be available. My advice is to go straight to a live account, but trade using a micro lot as a starting point as you get started. This will allow you to become familiar with the platform, with trading, with entering, managing and exiting positions, using the smallest financial risk possible.

When you have a live position, focus on the pips, not the dollar amount. This will help to reduce the trading emotions, which I will cover shortly in more detail.

Finally, keep a diary of your positions and why you opened them. This can be very simple, but will help you to improve from the insights gained when you look back at your trading history. Note down what you traded, and when, the entry trigger, and why you closed out, along with details of what happened next. This will then build into your own personal trading diary and also help to highlight possible problem areas. Perhaps you are being stopped out too often, in which case you may need to adjust your lot size and increase the pip loss per trade. Perhaps you are closing out too early and exiting strong positions too early. Perhaps you are trading with a bias, always short or always long.

All these things and many more will be revealed in your trading diary. It does not have to be pretty and no one else will ever see it, but keep one you must. It is the diary of your trading journey and will help you enormously as your skills and knowledge develop.

Finally, your trading plan is a living thing. Don’t be afraid to make changes to it, to tailor it or adapt it, as your circumstances change and your knowledge grows. Nothing is cast in stone forever and provided you maintain your money management rules, everything else can be modified to reflect changes in your personal life.