All forex traders have different backgrounds, market views, risk appetite, thought processes and expectations. Therefore, traders should not just blindly follow what other traders do. They should develop their own personalised trading plan which they can update as they learn from the forex market. Building a trading plan for online forex trading and sticking to it are the keys to developing a solid trading discipline. Always consider questions like what is your motivation and attitude to risk? Are you willing to spend a lot of time on this? Also, what is your level of experience and knowledge?
What is a forex trading plan?
A trading plan is a thorough structure that directs your decision-making in whatever trading activity you engage in. In other words, a solid trading plan gives information on what, why, when and how something will happen regarding trading forex. It reflects the trader’s personal trading style, expectations and experiences as well as tolerance toward risk. If followed correctly, a trading plan helps in potentially limiting possible trading mistakes and minimising losses.
Usually, a trading plan leaves out any emotions that can hurt your trading. Trading with emotions may lead to irrational decisions. To prevent this, you try to minimise thinking by having a forex trading plan for every potential move you make.
Anything you deem beneficial can be part of your trade plan, but it must always cover the following:
- Your driving force behind trading
- The time you want to spend
- Your objectives in trading
- Your risk-taking behavior
- Your available trading capital
- Principles for managing personal risks
- Your preferred marketplaces for trading
- Your techniques
- Steps for maintaining records
Do I need a trading plan? 4 reasons
Establishing a solid trading plan enables you to define your ideal trading conditions and make rational trading judgments. Numerous online forex brokers offer a comprehensive suite of educational material for developing a trading plan.
All in all, a forex trading plan offers the following advantages:
- Trading is simpler since everything has been planned out in advance, allowing you to trade within your predetermined boundaries.
- Taking emotions out of the decision-making process allows for more objective judgments since you already know when to take profits and cut losses
- By consistently following your strategy, you may learn why certain transactions are successful while others are not.
- There is always room for improvement as having a defined record-keeping process allows you to learn from previous transactions.
How to build your forex trading plan
- Make your own personal evaluation. Make sure you are prepared to trade and that you can act quickly on your signals. Before you start a deal, identify your skills and weaknesses.
- Define your trading objectives. Write out your trading goals and start by establishing them on paper. Examine and evaluate your financial objectives and timetables for achieving each trading objective, and make sure that after a profitable trade, you will close the position and not get overconfident.
- Be motivated. Spend some time considering why you trade and the goals you have for yourself.
- Determine your trading approach. Check to see if your techniques for spotting and seizing trading opportunities in the market are effective. Testing the strategy on a demo account before opening a live trading account would be a nice idea. The majority of forex trading brokers out there offer a demo account to their clients.
- Be mentally ready. Describe the requirements that will guarantee that you are in the trading area. This entails being emotionally and psychologically prepared to face the trading environment. Getting enough sleep, being in a good mood, and being in an atmosphere free of any form of distractions—physical or psychological—all fall under this umbrella.
- Carry out extensive research. Any trading day or session must start with you have done your homework. This entails finding out as much as possible about the markets or assets to trade, their crucial price levels, and the current state of their fundamentals. Simply put, conducting extensive research means that nothing happens out of luck but rather under a well-thought methodology.
- Determine your trading timelines and markets. Choose your trading strategy and market based on your experience and expertise. The market you are most comfortable with is the ideal market for you. It makes no sense to assume a trade will be profitable when you are entering a foreign market that you know nothing about. Additionally, it’s crucial to be aware of each market’s trading session schedules because certain trades require extra attention during key trading periods. A CFD forex broker usually gives access to trading CFDs on various markets like forex, metals, shares and more.
- Determine your risk tolerance upfront. Be sure to enter an amount that represents the maximum amount you are willing to risk each time you open a position or fund your trading account. Always stick to the initial balance and leave your emotions out. To achieve this, you may apply some risk management techniques. Next, choose whether to open a position in the buy or sell direction. This decision can be made by analysing the charts or reading up on the most recent market analysis.
- Choose when to enter or exit a position. This means that you need to set your stop losses and profit targets, leave room for modifications, and avoid being emotionally involved in your trade.
- Control your feelings. Do not let your emotions impair your judgment; instead, approach your trading as a business.
- Keep a detailed trading journal. Keep a thorough journal of every trade you make. This applies to the time before you enter a deal, as well as the time during and following the trade. Keep track of the targets, underlying feelings or emotions, and reasoning you used to enter and exit any trade. In other words, record everything.
- Examine your trading strategy. Evaluate all of your transactions and determine what needs to be improved and where you need to adapt or improve.
Forex plan vs forex strategy
A trading strategy alone is not a trading plan. A trading strategy will direct your market entry and exit decisions in a way that increases the potential for profits and minimises risk exposure. Technical analysis or fundamental analysis may be the foundation of a trading strategy. A trading strategy is only one element of your total trading plan, which also includes your trading journal, your trading psychology and trading goals as a whole, your risk management techniques and your overall trading motivation.
A trading strategy specifies in great detail how you should join and exit transactions. An example of a trading strategy could be: “Buy the X asset when it reaches this amount and sells it when it reaches this amount”.