The most important structural part of a house is usually unseen. If the foundation of a house is cracked, not level, or deteriorating, the home is no longer safe. The family living inside is at danger and the first priority of the owner should be to get the foundation fixed.
Many have a vague plan for Investing, but do not have a solid, non-negotiable trading system in place. Your trading system covers everything from your tools and entry strategy to your risk management. It answers every question before it needs to be asked.
In Forex trading, the market can be brutal. It is commonly stated that 95 or more percent of traders lose in the Forex Market which speaks to the difficulty of trading it. That is why it is essential to build a personal and successful Forex Trading System.
There are many aspects to a successful system, but today I want to focus the importance of Trade Management.
Before I jump into the details, though, I want to hit on the importance of a good entry strategy so that you have something to use your Trade Management with.
Before you can manage a trade, you need to open a trade. Whether your entry strategy is a moving average cross, trend continuation momentum, Fibonacci bounces or Bollinger Band reversal set-ups; the most important aspect is that you stick to it and remain consistent.
Don't take a “good trade opportunity” if it does not follow your entry credentials. If you find out over a period of time that your entry strategy is simply not putting you into good profit potential, develop a new one and test it on a demo account until your profitable for a substantial amount of time.
A house isn't built in a day, it takes planning and time. A long-term investment approach is the same way. Many people who try to get-rich-quick, actually get-poor-quick because of their lack of planning.
Having an entry strategy is very important, but even more important is your trade management strategy. Let me explain why.
Trade Management Plan
Let me give you an example of why your trade management really determines your success as a trader.
You and your friend Bob took up Forex Trading last year and you want to make 2013 the year that you start bringing in cash!
You sit down, create a trading plan, and now you're off to the races. Since you didn't spend a lot of time researching, you thought an entry strategy would be sufficient to secure success.
“Let's enter on a 30/30 cross, put a 10 pip stop loss in, and let that trade run Bob!”
“Sounds good!” Bob replies.
With the same entry strategy, you and Bob start your Forex career. You quickly find out that your plan didn't cover all the possible scenarios. After you lose $20,000 and Bob loses $60,000, you think to yourself: “Self, I need a better plan”.
Yes you do!
You established an entry strategy but nothing else! What you failed to realize is that an entry strategy alone cannot make you money—just getting into the market has nothing to do with how much money you are going to actually get out of the market with. You need to have a plan to manage your trades, so that after you enter and give yourself the potential to make money on a trade, you actually make some of that money!
The most important aspect to a good management plan is knowing exactly what you are going to do with the trade before you have to do it.
Ask yourself questions like these:
Will I use a trailing stop if my trade goes into profit? And if so, when do I begin the trailing stop and by how much do I trail it?
Then answer the question in detail so that you know exactly what you are going to do before you even enter the trade—this way, you won't need to make rash, emotional decisions with your hard earned capital at risk.
Answering these questions before they arise will position you for long-term investing success. Your answers may change from time to time, and from trade to trade; but that just goes back to planning out for every scenario and knowing what the answer will be as the scenario changes.
So again, the goal of the trade management plan is knowing how you will manage your trade ahead of time so you are not making emotional decisions during the trade.
Having your plan and answering these questions before entering a trade will give you confidence to make the right move.
When your trade is about to hit the take profit and you are wondering “should I move the target up and add to the trade?” You will already have an answer!
And the answer should be “No”, I set up my trade with the take profit for a reason and I do not need to get greedy now.
Preparation provides freedom, not bondage. Instead of wondering “AH, what should I do?!” You already have a plan.
You and Bob could start with the same amount of money, the same entry strategy, and see totally different results depending on your trade management. A key to profitability is knowing 'how you will manage your trades', not 'what trades will you enter'. Make this the year you establish your foundation and start building your wealth house.
By: Nathan Tucci