ARMFA trader's trading plan
There are four questions a trader's trading plan answers: «what do I trade», «under what conditions do I enter», «how much do I risk» and «when do I stop». Its value is not in the disciplining effect but in being checkable: only written rules can be compared with the journal to see what went wrong.
What goes into a trading plan
Six sections. Each has to be worded so that an outsider could use it to decide whether a trade follows the rules or not.
Which pairs are traded, on what timeframe and during what hours. A limit on time matters no less than one on instruments: the spread and the character of the movement differ between sessions.
section 1The list of signs under which a trade is opened. The wording has to be checkable: «a break of the level with the candle closing above it» instead of «a strong impulse».
section 2How the distance to the stop is defined and where the target is set. The minimum acceptable ratio of risk to reward for an entry goes here too.
section 3The percentage of risk per trade, the volume formula, the limit on the total risk across open positions and the rule for correlated pairs.
section 4When the stop is moved to break-even, whether the trailing stop is switched on, under what conditions part of the position is closed. These rules are written before the entry.
section 5The daily and weekly loss limit, the ceiling on the account drawdown and what happens once it is reached.
section 6How to write a forex trading plan in one evening
The plan is written once and revised on a schedule. The order of the steps matters: each next one rests on the numbers from the previous one.
The win rate, the average ratio and the longest losing streak over the last 100-200 trades. If there is no history, the starting values are taken conservatively and revised after 50 trades.
30 minutesBy the length of the streak: the expected losing streak must not take the account past the drawdown ceiling. For a start it is usually 0.5-1 %.
one calculationIn checkable wording: not «a strong impulse» but «the candle closes beyond the level». The rules for moving the stop and for partial closing go here as well.
1-2 pagesThe daily one, the weekly one and the ceiling on the account drawdown, all multiples of the risk per trade. And the order of actions when each of them fires.
four numbersNo more than ten items with a yes-or-no answer — the kind that really can be gone through in half a minute before a trade.
10 itemsA trade checklist for a currency pair
The plan is read once a month, the checklist before every entry. It contains only what can be checked in half a minute and has a yes-or-no answer.
The ticks are stored in the browser — this is a personal checklist, nothing is sent to a server. The list can be shortened, but it is not worth extending: a checklist longer than ten items stops being gone through.
How to check that the plan is being followed
A plan without checking turns into a declaration. The check is done against the journal and takes fifteen minutes a week.
| What is compared | Where it comes from | The sign of a problem |
|---|---|---|
| The actual risk on trades | The journal: the loss on trades closed by the stop | A deviation from the calculated one of more than 10 % |
| Share of off-plan trades | A mark for «to plan / off plan» | More than 20 % of the total number |
| Keeping to the daily limit | The sums by day | At least one day with an excess |
| The average ratio of risk to reward | The results in R | Below the minimum declared in the plan |
| Maximum drawdown | The equity curve | Deeper than the ceiling written in the plan |
The point of the check is not self-discipline but diagnosis. If the actual risk is systematically higher than the calculated one, the problem is in the volume calculation, not in your character. If the share of unplanned trades grows on Fridays, the matter is fatigue, and it is cured by a limit on days rather than by a promise to pull yourself together.
Frequently asked questions
Where can I find an example of a trader's trading plan?
Someone else's ready plan is useless: it describes someone else's strategy and someone else's risk. It is more practical to take the six sections above as a template and fill them with your own numbers — the result is an example that applies to your own trading.
How long should a trading plan be?
One or two pages is enough. Long documents do not get re-read, and it is re-reading that makes a plan work. Everything that does not affect a specific decision is better removed from the plan.
How does a trading plan differ from a strategy?
A strategy describes how to find trades. A plan includes the strategy as one of its sections and adds what turns it into trading: the rules for risk, volume, management and stopping.
How often should the plan be changed?
On a schedule, not on the outcome of a single trade. A sensible rhythm is once a month or after every fifty trades: by then enough statistics have accumulated to show which rules actually work.
What do I do if the plan has been broken?
Mark the breach in the journal and carry on by the plan. The most useful thing is to accumulate such marks and look once a month at the circumstances in which they arise: almost always a pattern shows up — the time of day, the day of the week or a state that follows certain events.
What goes into the section about instruments?
A specific list of currency pairs and the hours they are traded. For example: EUR/USD and GBP/USD, the European and American sessions. A limit on time matters no less than one on instruments: in the Asian session these pairs move differently and the spread is wider.
How do I write the volume rule so that it cannot be interpreted?
As a formula and an order of actions: «a limit of 1 % of equity; lot = the risk amount ÷ (the length of the stop × the pip value); down to hundredths; check that margin is no more than 25 % of equity». Such a rule is either followed or not.
Do I need a separate plan for every pair?
Not if the rules coincide. Only the numbers may differ: the length of the stop in pips, what a pip costs and the hours we trade. That is conveniently put into a table inside one plan.
How does the plan relate to expert advisors?
The same way: the advisor's parameters are part of the plan, and the conditions for stopping it have to be written down on a par with the manual rules. Otherwise the decision to switch the robot off is taken in the middle of a drawdown and without a criterion.
What do I do if the market has changed and the plan has stopped working?
Check it against the journal over the last 50–100 trades: did the expectancy fall or did the share of trades outside the plan change. In the first case the entry rules are changed, in the second — the discipline. Everything cannot be changed at once: afterwards it is impossible to tell what helped.
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