Looking for a comprehensive trading plan contains features to guide your trading decisions? Great, you’re at the right place. A comprehensive trading plan helps you decide on how much to trade, your trading principles, and how you choose when you buy or sell your assets. A forex trading plan is more comprehensive than a strategy specifying how you will enter and exit trades. A forex trading plan is like a mini-business plan containing operational and strategic details.
Closing profitable trades consistently in the forex market does not happen by chance. You need a good skill set and a solid trading plan to trade forex better and profitably. In this article, you’ll learn how having a trading plan gives you a better advantage, how to create one, and what to do to stick to it. Your trading plan isn’t just a how-to guide on how you should open your Forex trades. It also contains;
- Your trading motivation
- The time commitment to trading per day/week/month
- Your trading goals
- Your risk rules
- Your baseline capital for trading
- The markets you want to focus on trading
- Your strategies and principles
- Trading activity record-keeping guide
Why you need a trading plan
Many traders don’t use a trading plan and trade impulsively, depending on the market conditions or personal feelings for decision-making. This action can have negative consequences as the market is more favorable for strategic traders than impulsive ones. Here’s why you need a trading plan:
- A trading plan helps you develop performance metrics to evaluate your trading activities.
- Using a trading plan makes you less likely to develop psychological issues common to many traders.
- Working with a trading plan reduces the number of bad trades you execute.
- Sticking to a trading plan prevents impulsive and irrational decision-making.
- A trading plan creates restrictions and rules; this helps you control the only thing you can control – yourself.
Essential components of a trading plan
The first step in creating a forex trading plan you can stick to is ensuring it suits you. Here’s an overview of the essential components of a trading plan to understand your trading styles better:
Your trading goals should answer questions like:
- What amount do you want to make trading forex in a month?
- What’s your annual profit as a forex trader?
- What do you want to achieve as a forex trader?
Forex has several trading styles, including:
- Position trading: where you hold a position for multiple weeks to months
- Swing trading: which involves trading a position for a few days to weeks
- Day trading: opening and closing a position within 24 hours
- Scalp trading: where you open and close a trade within short time frames of minutes to hours
A winning trading strategy is one with which you have a high chance of opening and closing a profitable trade. It contains how you would choose an entry and exit position. Your plan will include the technical indicators and other tools or factors to consider before deciding what currency to trade.
Your trading routine is a deep look into how you fit trading into your daily life. When do you start trading? For how many hours? Where do you trade, and for how long at a time? Any breaks? What are your goals for each session? For example, start with research and catch up with forex news before entering a trade.
Risk management plan
Your risk management plan should cover how you plan to mitigate risks. The plan should include the maximum leverage you intend to use per trade. You should also add the maximum stop-loss you can afford.
Your trading plan should include how you plan to revise your trading activities. This should include how your trades go and how much you profited or lost. It also has to show how often you plan to monitor your plans, identify flaws and correct them.
How to create a trading plan
1. Do a personal assessment
You must be sure you’re ready to trade if you’re going all out to create a trading plan. Rate your forex trading skills, including your strengths in detecting good entry and exit points. How resilient and disciplined are you in sticking to your signals? This assessment will help you understand your style and how to best position yourself for success.
2. Set your risk level and goals
Determine how much you can risk per trade and your stop-loss range. Your risk level should be related to the amount you can let go if your trade does not go in your direction. While setting your goals, be specific, and determine a particular amount you want as your target. Also, be realistic and set a deadline for goals. This will motivate you to stay committed.
3. Define your strategies
Next, define your forex trading style, strategy, and routine. Once you’ve defined your trading strategies, you’ll have what it takes to trade with fewer risks and a higher propensity to make profits. Your strategy should also involve how to measure your performance. One of the best ways to keep track of your progress is by keeping a trading journal of your daily activities, so you can analyze them to find patterns that you can either build on or destroy if unprofitable.
When starting in forex, you’re not immune to being influenced by the market’s sentiments. As a smart trader, you need to operate strategically rather than impulsively. The first step is to create a trading plan containing your trading routines, strategies, goals, and evaluation entries. Sticking to your goals is the key to getting the best from a trading plan. If you have difficulty sticking to your trading plan, consider getting an accountability partner to keep you on track.