Forex trading plan: why you need it and how to make it
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If you want to succeed in the Forex market, you need to be able to plan ahead. If you decide to dive head first into the Forex market without any preparation the chances of you succeeding are very unlikely. You need to know what you're looking for, what your aim is and how you plan to achieve your goals.
Many sources will stress the importance Forex trading plans, not only for beginners but also for the most advanced traders. This article will provide you with a better understanding on the importance and uses of a Forex trading plan, so that you can use the information to become a better and more successful trader.
What is a trading plan?
A trading plan in the FX market isn't really any different from any other plan you could imagine. It is an outline of your planned trading activities, something like a to-do list when it comes to trading Forex online. The main idea of the trading plan is to develop a set of rules that you are going to adhere to and how you are going to implement them. Once you have the rules written, it is much easier to apply them as there is a clear plan of action on how they need to be followed. In addition to this, a trading plan can help you analyse the market better and apply your analysis to your trading strategy.
A Forex plan can prevent you from making rash, irreversible decisions - something that is particularly useful when emotions start to come into play. They stop you making silly mistakes and allow you to evaluate your wins and losses. Now let's look at how to make a Forex trading plan.
Making an FX plan
In the beginning, developing a plan is rather simple. The first step is to determine the frequency of your trading. You may observe your account history and determine how many trades you were opening on average per day or per week and what the average duration of your trades were. This is vital, as your plan should clearly illustrate the time dimension that you're going to be using in your trading. If you are a day trader, your plan should be plotted over 24 hours. If your positions tend to be closed within a few days after they have been opened, then you would be better off illustrating your plan over a week. This is vital in order to understand how to develop a Forex trading plan.
Once you have determined the frequency of your trading, you will have to either consider a day or a week as a dimension for your trading plan. In some rare cases, you will have to use a month, but this is quite unlikely. Let's assume you are a day trader, so we are going to consider a day as a unit of time for our plan. As we have determined this, it is now time to add the limitations to the trading plan. The rule of thumb is to take a number of your winning trades and multiply it by 1.2. In other words, if on average a trader makes 20 trades per day, yet only six trades are winning ones, a trader should not trade more than seven trades per day. Limitation of trader is certainly beneficial, let's look at why this is the case.
Typically, the idea 'less opportunities' has a negative meaning, yet this is not necessarily true when it comes to trading. In order to understand how to make a winning Forex trading plan, we should acknowledge that every opportunity in FX market can bring both profit and loss. Once you have decided to limit your trading to a set amount of trades per day, you will tend to focus on the trade with much more detail. Every trade that you will be making will be analysed much closer, as with a every wrong trade you will not only lose money, but you will also lose opportunities to open new trades that could have been winning ones.
Lower chance for emotional trading
Another important aspect of limiting your trades to a certain amount is to avoid trying to regain balance through emotional trading. Many traders encounter this problem more often than you would think. They end up losing money on the market, don't take time away to regroup and rationalise their decisions and instead make hasty, often silly choices. Usually these traders will make additional trades to try and compensate for their losses. This is often done with an increased volume, creating a higher level of risk, and this is what leads traders to potentially lose money.
How to prepare a Forex trading plan
We've looked at the importance of time dimensions for your trading plan and how limitation of your trades is vital, so let's take a look at the other items that will help you in preparing your trading plan for the FX market.
Many of us have had the same feeling when you see market prices. You want to jump straight in as you believe that something major is about to happen. Later you find yourself with an open position and you do not really know what to do with it, where to close it, or what profit to look for. This is quite often the case, especially with newbie traders. Every Forex trading plan should include a clear description of the entry signals you are planning to use in your trading strategy. Once you have noted down these signals, the main task is to adhere to these signals. Needless to say that such signals should be as descriptive as they can be. In other words, if you are using four indicators in your chart setup, you should include all four of the indicators in the description of your entry signal.
Quite similar to entry signals, every trader should have a clear understanding of their exit signals when it comes to learning how to prepare an FX trading plan on a professional level. Opening a trade at the right time and on the right instrument is essential. However, in some cases you may close a decent trade and lose out, just because you were not patient enough. You could also risk closing a winning trade too early and miss out on the full profit you could have achieved. This usually happens due to the lack of exit signals in the trader's plan. In order to make your plan the right way, you should have a clear overview about the profit you expect to make for each trade.
SL and TP
As we have just mentioned, exit and entry signals are vital. Such signals let you understand how to trade according to your trading strategy and adhering to this will eliminate the need of adding your emotions to the whole trading process. What is an important point to cover is that every trade should have a stop-loss (SL) and take-profit (TP) attached to it. When looking at how to write a Forex trading plan, it's worth bearing in mind that SL levles are much more important than TP levels.
As a disciplined trader, you should ensure that every trade you place has a stop-loss level attached to it. There should be no exception when it comes to setting up a stop-loss. In addition to this, your trading plan should actually list a stop-loss level, perhaps it could be different for various trading instruments, but it should definitely be there.
Take-profit levels aren't as important, however, to make the best Forex trading plan, it is recommended to set take-profit levels before you actually commit to any trade and write them down as a part of your trading plan.
Now you have understood how to build your own Forex trading plan, it is time to take action. If you already have some history on your MetaTrader platform with Admiral Markets, then go ahead and perform a quick analysis of your trading habits. Check how long your positions usually last, what the amount of winning trades on average per day or per week is and set yourself some limits. Once this is done, check your trading strategy for exit and entry signals, write them down in your Forex trade plan and get organised in FX trading.