A Forex trading plan should be a top priority for every trader. Consistency year after year cannot be achieved without one.
What Is A Forex Trading Plan? A forex trading plan is a personal plan that you have designed that shows your trading methods in their simplest forms. It shows what triggers your entries and also shows how you close trades. Your risk control and trading psychology are reflected in the trading plan.
It is a set of guidelines or rules that govern your entire thought process before executing a trade, during, and even when closing a trade.
For a trading plan to work, it has to be followed strictly. Also, as refinements to your trading strategy are made, they should reflect in your trading plan as well.
Importance of a Forex Trading Plan
- With a trading plan, over-trading is curbed. Traders learn to wait for ideal market situations in accordance with their concepts.
- A forex trading plan reduces losses.
- A trading plan helps filter out high probable setups.
- It allows traders to measure and improve performance.
How to create a Forex Trading Plan
The first thing to consider in your trading plan is your approach to the markets. “What is it you look for?” “What patterns do you look for?” It could be live price movements as in price action or a pattern.
Once this is determined, a step forward to determine market situations that your concepts work best.
This has to be done repeatedly to guarantee it’s not just a coincidence and to build confidence.
After that has been established, the following are considered;
1. Slim down your watch-list
There are so many pairs to trade, and that can be bitter-sweet. Focusing on too many pairs does more harm than good.
Your attention is divided, and you end up chasing trades and switching from one chart to another.
Stick to your favorite pairs, four at most, and understand their behaviors.
Only a few pairs are needed to make profits; you cannot catch every move. A few quality setups outweigh various trades with a low risk-to-reward ratio.
2. Time to trade
Trading psychology should be factored in as well. “When are you most comfortable trading?”
Choose a trading session most suitable between the New York and London sessions (high volatility occurs in these sessions) and stick by it.
Staring at charts all day is not efficient. Fatigue and tiredness start to kick in, and sloppy mistakes are made.
Of course, they will be situations when a trade meets every criterion in your trading ideology outside your preferred session.
In a scenario like that, the trade can be taken, but the risk should be reduced.
3. Risk management
Choose a percentage of your account you can “afford” to lose and stick by it. A risk of 1% or 2% is ideal. A consistent risk is important if consistency will be achieved.
For instance, two consecutive losses were taken. On the third trade, a take profit of 1:5 was hit.
A forex trader that risked the same percentage covered up his losses and made more to top it off.
While a trader who over-leveraged on his first two losses but reduced his lot size due to fear didn’t even cover up for his loss.
It is so important to have a standard risk in your trading plan. It improves returns and trading psychology as a whole.
4. Exit conditions
At what levels will the profit be taken or broken even? This is very important as well.
For instance, price action traders will include a previous low, previous high, and areas of large liquidity as a profit target in their trading plan.
Profit will be taken before the target is reached when order flow is not maintained.
Stop-loss placements are also considered. A stop-loss will be placed at the point that regards your bias or entry invalid.
Once a loss is taken, take it on your chin and learn from it and adjust your trading plan to avoid a re-occurrence.
Also, when three losses in a row are taken, step away from the charts to reflect and clear your head. Revenge trading to make up your losses will only result in more losses.
Summary: Forex Trading Plan
The first step to fully realizing the true potential of a trading plan is iteration. Iteration is the repetition of processes to generate a sequence of outcomes.
In forex, iterating is backtesting. There is absolutely no rush to go “live.” Confidence in your trading concepts and, most importantly, yourself has to be attained first.
Stick to the demo for as long as possible until you have flipped accounts multiple times and developed a trading plan.
Understand your trading concepts in and out, and learn to transition from hindsight (breaking down previous market plays) to foresight (forecasting market movements).
One word; adapt. The forex market brings forth complex situations all year round. Refine your trading concepts to match the markets, and of course, your trading plan is adjusted as well.