No trader should venture without a plan in such a competitive and volatile market like the Foreign Exchange. If you’re having trouble understanding what a trading plan is, what it contains and how it works – here’s a comprehensive guide to get you started!
What is a forex trading plan?
Are you familiar with that old saying “Fail to plan and you plan to fail”? It doesn’t have a fixed definition, but broadly, it represents a series of steps you need to make when executing a trade. Because the Forex market is the largest and most liquid on the globe, without discipline and knowing what you want, you simply can’t achieve your personal targets. A trading plan brings a new perspective upon the market and guides you to identify and take advantage of the best trading opportunities.
How to create a Forex trading plan
Although its definition makes it sound a bit simplistic; creating and following a trading plan are actually two complex processes. There is no standard format for a trading plan – you need to design it according to your personality, trading style, strategy, and financial expectations. You can begin by creating a draft and adjust it along the way based on what your experiences teach you.
Here is a non-exhaustive list of what a trading forex plan should contain:
1. Relevant data
It goes without saying that before opening a trading position, you need to analyze the market conditions, the news related to the currency pair you’re trading, the difference between their interest rates, the economic indicators, and other information you find relevant. The broker you pick to trust with your investments can help you in this regard. We encourage you to trade with TradeFW.com, a licensed forex broker renowned for its excellent educational materials & analysis and an overall professional trading environment.
2. Your financial goals
Naturally, you execute a trade with the purpose of creating trading opportunities. A healthy trading behavior implies knowing exactly what you’re aiming for. Be realistic and stay grounded, don’t overtrade to compensate for your losses.
3. Clear objectives
Now that you know what you want, in accordance to the first two steps we mentioned, settle how and when you want to do that. Choose what strategy to apply, as well as the key moments to enter and exit the market. There’s no need to make trading harder than it needs to be, stick to the chart patterns and the data you gathered.
4. A risk management system
The forex trading volume surpasses $5 trillion each day; can you imagine how volatile and risky this market is? You might enjoy the thrill this market gives you, but trust us; you won’t be smiling once it turns against you. A risk management system is vital. You can create one by implementing forex orders, such as stop-loss and trailing stop order, take profit limit, and even market orders.
5. A trading journal
A trading journal is a bit similar to a trading plan, the major difference being that it is much more comprehensive. It implies tracking your trading activity and writing it down in a notebook, an Excel file, or Word document – preferably with chart print-screens and other relevant visuals. It also needs to include notes about your emotions, your errors and overall thought-process.
Why a trading plan can make the difference
In forex trading, just like in life, opportunities don’t come overnight or just because of a lucky happening – it comes through hard work and patience. A trading plan helps you know what you want, how to get it and how to remain focused in any circumstances. When you fail – be patient, identify the error and adjust your plan. When you succeed, monitor your activity and apply it again. Moreover, a trading plan forces you to become a more disciplined trader. Emotions can sometimes push you to make illogical decisions. Greed, panic, fear, euphoria, or anxiety are among the most common emotions a trader can experience and are usually destructive emotions that can sabotage the outcome of your trades. One of the many roles of a trading plan is to help you overcome these obstacles and stay focused on your objectives and goals.
The Foreign Exchange is a challenging market. A trading plan is the most important factor if you plan to become an experienced forex trader. In order to create one, you can follow the five major points we mentioned in this article, and eventually tailor it to your needs and trading style. Finding the right mindset and perfect trading plan takes time, but the financial opportunities and fulfillment will be worth it!