What is a worked example of Plan Components?

Direct answer

A worked example of Plan Components shows how the different parts of a trading plan fit together by using a specific numerical scenario. It defines each component, states every assumption used in the scenario, and then demonstrates the plan’s mechanics step by step. The goal is not to predict outcomes, but to help you explain the components accurately and verify the calculations.

Mechanism and definition

Plan Components are the building blocks of a forex trading plan. A practical way to explain them is to treat the plan as a set of inputs and rules:

Trade decision rule: a condition that decides whether the plan triggers an action (for example, “if X condition is met, then proceed”).
Risk budget: how much of account equity you are willing to lose if the trade goes the wrong way.
Position sizing method: how size is computed from the risk budget and the stop distance.
Execution assumptions: what you assume about fills (such as order types and the meaning of “the stop distance you planned for”).
Cost model: how costs like spread and commissions are treated in the calculation.
Review rule: how you decide whether to keep, adjust, or stop using the plan based on defined evidence.

A worked example clarifies which of these are stable mechanics (you control how they are computed) versus variable conditions (market movement, realized costs, and execution quality).

Evidence or worked scenario (with explicit assumptions)

Below is a self-contained numerical example. It does not use live prices.

Assumptions (state them before calculating):

Starting account equity: $10,000.
Risk budget per planned trade: 1% of equity → $100 maximum loss.
Planned stop distance: 50 pips (the distance used for sizing).
Position sizing is computed with a simple linear model: $ per pip = (planned risk) / (stop distance in pips).
Costs are ignored for sizing in this first pass (this is an intentional limitation we address later).

Step 1: Convert the risk budget to dollars-per-pip capacity

Risk budget = $100
Stop distance = 50 pips
Allowed loss per pip = $100 / 50 = $2 per pip.

Step 2: Determine position size using the $/pip capacity To translate “$ per pip” into units, you would normally use a conversion based on the specific currency pair and quote conventions. Because no pair is provided, treat this as a conceptual sizing step:

The plan’s position sizing rule should choose a size so that the realized loss at the planned stop distance is about $100.
Independently checkability requirement: if you later specify the pair and instrument contract, you can compute whether the resulting $/pip matches $2.

Step 3: How the plan behaves if the stop is reached

If price moves to the stop distance of 50 pips, the model expects the loss to be approximately $100 (again, only under the assumption that realized costs are negligible and fills occur as assumed).

This illustrates what “worked” means: you can point to each input, show the calculation, and test whether the plan mechanics are consistent.

Limitations and risks (material failure modes)

Worked examples still have important limits. At least one material failure mode is often the gap between the model and reality:

Execution and spread mismatch: even if you plan a 50-pip stop distance, the realized distance can differ due to spreads, slippage, or order fill behavior. If costs are larger than assumed, actual loss can exceed the modeled risk budget.
Linear pip-to-money assumptions break: the “$ per pip” relationship depends on pair, quote currency, and contract specifications. If those details differ from what your calculations assume, the sizing rule may not deliver the intended maximum loss.
Decision-rule ambiguity: if the trade decision rule (“if X then act”) is not operational (clear triggers, measurement method), you may interpret it inconsistently, which invalidates the worked example’s meaning.
Review rule overfitting: using a worked example that fits one scenario can cause the review rule to reward luck rather than robustness.

Verification and next question

To verify a worked example of Plan Components independently, check that:

Every assumption is stated (risk %, stop distance, conversion method, whether costs are included). - The mechanics are internally consistent (risk budget → sizing computation → expected loss under the stop scenario).