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Creating a Trading Plan (Part 4)

After identifying the trading mindset, trading goals, risk management, and trading strategy, the final step in designing a trading plan is to establish rules for entry and exit.

Plan for Trading Strategy

The core of a trading plan is the strategy. In forex trading, a trading strategy refers to the rules for entry and exit. Almost all strategies in forex trading focus on 3 types: breakout, retracement, and reversal.

  1. Breakout: The beginning of a new trend after consolidation or sideways movement. Traders usually enter after the price breaks through key levels (strong support or resistance).
  2. Retracement: Short-term corrections in the direction of the long-term unchanged trend. Traders usually enter when the correction ends and the price starts moving in the direction of the main trend.
  3. Reversal: Reversal of the trend direction, either short-term, medium-term, or long-term. Traders usually enter after there is a valid reversal signal.
Rules for entry and exit are standardized criteria for identifying price movement characteristics that help determine the right time to enter and exit the market.

Some questions that help in creating a trading strategy plan are:

Entry Rules:
  1. What rules have you set for entry?
  2. How do you create these rules?
  3. What trading signals will trigger you to enter?
Exit Rules:
  1. What rules have you set for exit?
  2. What trading signals will warn you to exit immediately?
  3. How do you determine the target profit on each trade?
  4. Do you use mechanisms to protect profits (such as trailing stop)?
Here are example answers that can help you understand how to create rules for entry and exit:

Example Answers:

Entry Rules:
  • My strategy involves following the trend by referring to retracements or small corrections that occur. I use the moving average bounce method.
  • I often trade the EUR/USD pair on the one-hour timeframe (H1) and use the 100 and 200 period simple moving averages (SMA) on H1 as trend references.
  • I wait for the second setup through the 100 and 200 SMAs on the five-minute timeframe (M5). If the EUR/USD has retraced towards the SMA 100 on M5, I will enter when the price bounces off the SMA 100.
Exit Rules:
  • If the retracement continues towards the SMA 200 (against my position), I will exit at a level 15 pips above or below the SMA 200.
  • The target profit I set is 50 pips, and I use a trailing stop after reaching a 15 pip profit.

By establishing clear rules for entry and exit, you can improve discipline and consistency in your trading. This helps you stay focused on the strategy you have set and avoid impulsive decision-making that could negatively impact your trading results.

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