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Of all the chapters in this book, this one is perhaps the most important, and also one of the most difficult to write. It is difficult to write for several reasons, not least because I have never met you, and may never do so, although I hope you will ‘e-meet’ me in one of my online sessions, or indeed at a seminar.

And the reason it is hard to write, is as you will see from the title, this chapter is entitled ‘Your Trading Plan’. It’s not mine, or anyone else’s but yours, and yours alone. It will be personal to you, your circumstances, your view of money, and your goals and objectives in entering the trading world. Over the years, your plan will develop, just as in other aspects of your life. As your knowledge grows, so your plan will change.

My purpose here therefore, is to try to provide you with ‘food for thought’, the basic ideas, principles and concepts, which you can develop into your own unique and personal trading plan. After all, it would be very easy for me to give you a blueprint of a trading plan and leave it at that. However, this is not what this book is about. In everything I write, I am trying to help, educate and teach based on my years of trading experience. And just as with every other aspect of trading, there is a great deal of nonsense written about trading plans, generally from people who have never traded in their lives, and it shows. These are my own thoughts, observations and ideas, which I hope will help you to understand why you need to have a plan, but where that plan stops and what I call ‘discretionary trading’ steps in, and in order to start the ball rolling, let me begin with a simple, extreme example to explain this statement.

You may already have come across the term ‘black box system’ which generally means a piece of software that mechanically produces the buy and sell orders. Your entry and exit signals if you like. In other words, you do nothing, other than follow what the software is telling you to do. In addition, the system may also implement the money management rules we looked at in the previous chapter. And that’s about it. Now, ask yourself a question. If anyone, anywhere, was ever able to develop a ‘black box’ system that worked, and worked consistently, then such a system would rule the world for its inventor. No one else would survive against it.

That’s the first point. In other words, no one has, and no one ever will develop a ‘black box’ system that works consistently to produce profits in all markets, and in all market conditions. Generally they work for a period when the markets are aligned to the algorithm, and then breakdown, normally during volatile whipsaw price action.

The next point is this. It may be very easy to produce a black box to signal an entry, but what about the exit, which is much harder? Can a black box system see the market, react to the fundamental news, react to related markets, or consider the technical picture in multiple time frames? No. In closing a position in the market, most black box systems will simply reverse the initial entry rule which is why none of them work. No, let me correct what I said here, they can work for a time, but then fail, and this is no great surprise, since it is impossible for anyone to design a mechanical system which has the flexibility to adapt to different market conditions. Some of the systems may work if the market is trending, but then fail in sideways moving markets. Others may work when price congestion is dominating market behaviour, and break down when the trend begins.

Many people have tried and failed, from ‘learned institutions’ to ‘trading gurus’ and the institutional banks and hedge funds under the general heading of 'high frequency trading'. All these systems have one thing in common, they all fail eventually, and some in spectacular fashion.

So what can we learn from all this? And more importantly, what is the relevance to us as humble retail traders when considering the ‘trading plan’? One thing I hope is clear from the above. A trading plan is many things, but one thing it is most certainly not is a set of mechanical rules, which you then follow on each and every trade. If it were, then we could call it a ‘black box’ trading plan, since this in essence is exactly what it is. A set of rules you follow blindly, irrespective of market conditions, and this is the problem. Most people who write about a trading plan will suggest you write your rules, and then apply them to the market. Blindly. Sorry, this is complete rubbish, and in the rest of this chapter I’ll explain why, and more importantly how to develop your trading plan so it is meaningful, but protects your capital at all times. And in a nutshell this defines the two polar extremes of any trading approach. One is systematic and the other is discretionary.

A systematic trader is just that. All trading decisions are passed to a black box 'EA' or 'expert ' advisor. Alternatively, a rule set is created and followed to the letter on each and every occasion. At the other end of the spectrum we have the discretionary trader, who may have one or two rules, but all trading decisions are taken by the trader. A discretionary trading can have some rules, but a systematic trader cannot have any discretion. It's that simple. Ultimately which approach suits you will be determined by your personality traits which we touch on in the next chapter on the psychology of trading. You may find the discretionary approach is just not for you, and be more comfortable as a systematic trader. Or vice versa. Whichever is the case, you have to find what works for you and what you feel comfortable using. We are all different and what works for one, does not work for another.

So let’s start with why we have a trading plan.

If you have read any of my other books on trading, you will know I love to use analogies to try to explain concepts in a simple and clear way. The analogy I believe works well here, is to think of a journey by car from A to B.

First we decide we actually want to travel from A to B. Then we get in our car and start driving. Do we drive at the same speed all the way? No. We are constantly having to adjust our speed for a variety of reasons. The road conditions may vary, the weather may vary, the amount of traffic may vary. These are all variables which influence both our driving style, and speed. If the roads are dry and empty, we can drive fast, but if it is raining heavily and there is a great deal of traffic, we are more cautious and drive slowly, and only speed up once conditions allow. We are driving in a discretionary way, because the prevailing conditions dictate this is the most sensible way to drive.

When you think about it, what we are actually doing is assessing risk, no more, no less. If the roads are wet and visibility is poor, we drive more cautiously, in order to lower the risk of an accident. As road and weather conditions improve, we feel comfortable in increasing our speed as we now judge there is less risk in driving faster.

To extend this analogy further, for those of us lucky enough to have cruise control on our car, would we consider driving with this on all the time? The short answer is no, since at some point the weather or traffic conditions or both, would force us to go back to our discretionary driving, or if not, accept the fact that sooner or later we would crash.

It goes without saying there are some ‘rules of the road’ which we never break, and these are always in force, such as which side of the road to drive on. We all drive on the right, or the left, depending on where we are in the world, and this, by and large, avoids chaos. Everything else we do on our journey is based on our assessment of conditions (other than stopping at traffic lights.)

We plan our journey from A to B. Our journey has two primary rules:

Virtually every other decision is discretionary. I accept the above is not a perfect analogy, but to me it best describes the core principles of what I believe should be the foundations to a sensible and workable trading plan. If you have a trading plan which is a ‘black box’ set of rules, you are on ‘cruise control’ and sooner or later you will crash, but as I hope I have explained, a methodology based on such an approach will ultimately fail.

There is no doubt you do need to have a trading plan, but one that is realistic and workable. This is what we are going to cover next.

Let’s start with the easy part - the two rules of trading.

These are the only rules which apply to every trade. Every other decision you make as a trader should be discretionary, and based on market conditions. The remainder of your trading plan will be developed around you, your personality, time available to trade, experience, trading capital, and many other factors. Nothing else is written as a ‘rule’ which has to be obeyed come what may. The only two rules which apply are those written above . It is no coincidence both of these apply to protecting your trading capital. As I tried to explain in the previous chapter, this overrides everything else. Your trading capital is like the ‘crown jewels’ and should be treated as such. These two rules are the foundations on which your own personal trading plan is built. Let’s get started on building your plan.

First and foremost, the amount of trading capital you have available does not dictate your trading tactics or approach to the market. Many books will suggest that if your trading approach is based on a longer term timeframe, you will need a significant level of trading capital. This is simply not the case. You can trade long term with a very modest amount, and it is simply a question of trading the correct contract size dictated by your money management rule above.

As a rough rule of thumb, trading approaches break down into two broad schools, longer term and shorter term. Many books will reference three, namely scalping, swing trading and trend trading, which could also be called, ‘short’, ‘medium’ and ‘long term’. Long term can be anything from holding a position for days, weeks or even months, whilst a short term position, is anything from seconds, to minutes to hours, and medium is anywhere in between. I have never been a great fan of these terms, so let’s just stick to simple, short, medium and long for the rest of the book. The underlying philosophy and principles are as follows.

A longer term approach to trading is premised on the principle that in adopting this strategy, a trader is prepared to accept a larger loss, in return for a larger potential gain in the longer term. Here, a forex trader might be prepared to accept a 100 pip loss, in return for the potential of a 300 or 400 pip gain in the longer term. Now the quid pro quo is that in order to allow this size of gain to develop over time, the forex trader accepts that he or she has to allow the position to ‘breath’, in other words, to allow for volatile price action to be absorbed. To go back to the driving analogy for a moment, you can think of this as a shock absorber on your car, which absorbs all the bumps and potholes, making your journey much smoother. This is what we have to do in trading, and match this to our timeframe. We have to try to absorb those bumps and potholes, as the price action develops on the chart without breaking our shock absorbers. In fact, this is a very good name for the stop loss - it’s a shock absorber - short and simple.

Let’s take a look at some chart examples and the approach if you are a short term, medium or a longer term trader. In the following examples I have taken three different timeframes, 5 minute, 1 hour and 1 day, which ‘very broadly’ represent the three trading approaches. On each chart we’ve taken a section of the price action where the market is moving sideways in order to demonstrate the ‘relative’ nature of price action in the various time frames.

If we start with the 5 minute chart, the two solid lines denote a period of sideways price action, where the pair has moved up and down in a 10 pip range. All of the candles in this period are in fact much less than this, with the largest candle at just over 5 pips. What we can conclude from this, in very simple terms, is that on a 5 minute chart for this currency pair, the average pip range is likely to be between 5 to 7 pips. This does assume there are no major items of fundamental news, which will always play a part, and on a major release, the pair could move 50 to 70 pips in this timeframe. But my point here is this - in general market conditions, where no external factors are imminent, then the typical price range for a 5 minute candle will be in single figures.

Now let’s move to an hourly chart for the same currency pair.

Once again I have taken the same approach, with a phase of sideways price action shown between the two solid lines. In this time frame the pair are moving in a 46 pip range, and the largest candle here is approximately half of this, and we can therefore assume as a very ‘rough rule of thumb’ this pair will move 20 - 25 pips during an hour (assuming no major external factors).

Finally if we look at a daily chart for the EUR/USD as shown in Fig 9.12:

Once again, I have taken a period of sideways price action, and here you can see that the spread this time between the solid lines is 148 pips. The widest candle here is approximately two thirds of this, so in very simple terms we can say that the average pip movement on a daily basis is around 100 pips.

The point I am trying to make here is this. As you begin to think about your approach to trading the market, the correlation between risk management and time frames is positive. In other words, the slower the time frame, the greater the distance any stop loss needs to be from your entry position, and I hope in the above examples I have shown you why.

In the first example, on the 5 minute chart, our average movement here was 5-7 pips, so any stop loss position would reflect this and it may be positioned to allow for perhaps 2 or 3 candles to move against you. Perhaps 20 pips would be the maximum here.

As a ‘medium term’ trader, using the hourly chart as our example, our ‘average’ candle was approximately 25 pips, and using the same maths as above, we would perhaps be looking to place our stop loss 50 or 75 pips away from the entry.

Finally, moving to the ‘long term’ approach, with an average candle of 100 pips, our stop loss would need to be somewhere between 200 and 300 pips away from our entry.

I hope the above examples have explained the ‘relative’ nature of risk and money management, and how and why this changes depending on your approach to the market. This then leads us on to ask, and answer two fundamental questions which I introduced earlier in the book.

Here I want to explore them in more detail now you have an understanding of the relationship between time frames and position management, as you start to think about your trading plan. These two questions are as follows:

To keep the maths simple for comparison purposes, we are going to use a 2% money management rule. The basic numbers are therefore as follows:

Our money management rule states 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:

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 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:

I hope you can begin to see 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 it is a ‘backwards process’ of starting with a financial value, and then applying this to an equivalent in pips, so 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.

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

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.

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

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, either our rules need to be changed, with an increase in percentage risk on our capital, or an increase in our trading capital.

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

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

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 manoeuvre, 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 the balance of risk and money management which is so crucial. It also goes to show, 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.

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 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 you have available. One of the pieces of advice I always give to new traders, is never give up any full time job while learning. 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, as I suspect that if you are relatively new to the world of forex trading, this approach may be the place to start for several reasons:

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 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 program 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’ 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, 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.

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/MT5 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 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. 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.

This is why I went to some lengths to explain 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. And just as important with a limited amount of trading capital.

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.

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 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 in front of the trading 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. However, there are several issues you need to consider carefully in taking this approach and these are as follows:

There are many other issues 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 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 the one that suits you, your commitments, your lifestyle and your personality.

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 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 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 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 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? And in my case, I use a third which is the relational element 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 I pay great attention to the fundamental aspects of broader economics, for many reasons, but for one in particular. Even if you decide ultimately 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?

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 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 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 http://www.forexfactory.com , 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, 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 will at least lay the foundations for you. The approach 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, 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 intraday 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.

Generally traders just focus on the headline numbers in much the same way as the media, since this is a quick and easy way to absorb the data. However, 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, it will continue. If it is ‘against’ the trend, 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 so dominant 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. This will change over time, but is likely to remain a feature in the short term, and even more so should China eventually become the world's largest economy.

Third and last, 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, and indeed is, but slowly. 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 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.

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 - K eep I t S uper S imple.

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 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, it is almost impossible to be precise in other aspects of your plan.

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

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.

Think about the advantages and disadvantages of various trading approaches. Your chosen approach may be dictated by your personal circumstances. If not, 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.

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, 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, you are looking for consistency. From consistency comes money - it’s just a question of increasing your contract size on each trade.

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. If you have a little more trading capital 2% is a happy medium as a starting point.

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 a piece of software is the correct way to start, or perhaps using one of the many technical indicators which are freely available. Trading indicators are there to help and provide additional supporting analysis quickly and easily.

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 this is not a route I advocate for many reasons, not least of which is this is too prescribed. It verges on the mechanical, and the market is not a mechanical animal. If it were, trading would be very easy.

If your entry is going to be discretionary, 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 your entry decision will be based on a combination of elements, perhaps, as in my case, volume, price action and supported with indicators. What you should also consider is your tactical approach. And by this I mean the tactics you are going to employ. For example, are you going to look for reversals, and be a reversal trader. Are you perhaps more comfortable joining a trend once underway? Or perhaps you are keen to only consider breakout opportunities? You may of course deploy all these and more. Or perhaps focus on just one and become and expert. Again this is a big subject and one you need to consider carefully. Are you going to take one tactic and employ it in all currency pairs? Will you use all these across all the pairs, or perhaps focus on a handful only? And in addition, this leads on to more questions concerning your focus on the pairs themselves. Will you focus on three or four perhaps, or all of the twenty eight 'major' pairs? These are all key questions and ones you need to consider and include in your plan.

Define your management and exit rules. This is another grey area for novice traders, and I’m afraid one 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 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 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 discretionary 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 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 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 candle which signals weakness with a deep wick to the upper body. 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 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 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 traders apply when in a market with a physical exchange such as 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 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 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 you can also 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 a mechanical plan will work consistently is somewhat naive in my opinion.

Your plan needs to reflect this and needs to be practical. If you are going to take your signals after a breakout 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 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.

The next step is to 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.

Execute your first trade with the minimum contract size available. I do not believe paper trading in a demo account teaches anything of value, other than how to use the trading platform. In many cases the live and demo feeds are 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. This will allow you to become familiar with the platform, with trading, with entering, managing and exiting positions, using the smallest financial risk possible. You will also start to learn to lose, which is all important, using tiny amounts of real money.

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

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. Screenshots of trades are also an excellent way to keep records. Just annotate them and print.

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 for ever, and provided you maintain your money management rules, everything else can be modified to reflect changes in your personal life.

In the next chapter we’re going to explore the emotional side of trading, and how to manage these emotions effectively. Understanding who you are, is the starting point, and from there everything else can be managed and tailored to enhance your trading success.