Writing a Forex Trading Plan
To successfully trade in the forex market as a beginner, it is important to follow a few tips for writing a forex trading plan throughout our journey.
The old business adage states, ‘Failure to plan is planning to fail.’ Some people think it is glib, but serious people should take those words to heart like they are written in stone.
There are two choices for a trader who wants to succeed: 1) follow a written plan methodically, or 2) fail.
It’s a great achievement if you are already in the minority of people who have written plans for trading and investing. However, a successful financial market approach or methodology takes time, effort, and research.
Creating a detailed trading plan has removed one major roadblock on your journey to success, even though there is no guarantee of success.
Writing a Successful Trading Plan for Forex Trading
A forex trading plan’s advantages
The act of having a trading plan is similar to having a map before embarking on a journey. If you didn’t know how to get places, would you go on a trip? Even if you are familiar with the forex market through trading in a demo account, you may find it a challenging experience once you trade with real money.
Trading forex is more of a business when traders have a trading plan. Forex traders know that a business plan is generally required for anyone working in a company to have a solid foundation to succeed.
A good trading plan also provides objectivity and clarity that can be extremely useful when trading on the forex market, often fast-moving.
However, having an objective and well-thought-out forex trading plan has the main benefit of allowing the trader to trade objectively, which implies less emotional involvement and greater confidence.
Being able to return to the market following an emotional-draining loss can ultimately determine whether or not you succeed in a risky endeavour such as forex trading.
10 tips to follow for creating a forex trading plan
1. Assessment of skills
Are you interested in trading? Would you be confident that your system will work in a live trading environment after you’ve tested it on paper?
Have you been following your signals without hesitating? Trading involves a certain amount of giving and taking. While most people lack a plan and generally throw money away after costly mistakes, the pros are prepared and take advantage of that.
2. Preparation of the mind
What is your current state of mind? Are you well-rested? How do you feel about your upcoming tasks? It’s best to take the day off if you are not emotionally and psychologically ready to fight on Wall Street-otherwise, you could lose your shirt.
You are almost assured to do this if you are angry, preoccupied, or otherwise distracted.
To get ready for the day, many traders repeat a market mantra. First, decide what mantra best fits your trading style. Specifically, keep your trading area free from distractions. Business is costly if there are distractions.
3. Determine the risk level
Should you risk a certain percentage of your portfolio on a single trade? It depends on your risk tolerance and trading style. On an average trading day, your portfolio should be at risk between 1 and 5% of your portfolio.
Losing that amount means you must get out of the market as soon as possible. When things aren’t going your way, it’s better to take a break and try the next day again.
4. Identify your goals
Prepare all your realistic profit targets and the risk/reward ratios before entering the trade. How much risk are you willing to accept? Typically, traders do not take a position unless it has a three-to-one advantage over the risk.
If your stop-loss is $1 per share, you should aim for a profit of $3 per share. Ensure that your daily, weekly, and monthly profit goals are established in terms of dollars or as a major percentage of your entire trading portfolio.
5. Get your homework done
You check the news worldwide before you open the market, right? Has the market gone up or down overseas? What is the pre-market price of S&P 500 index futures?
The fact that futures contracts trade day and night makes index futures a good indicator of market sentiment before the market opens.
When will economic data be released, and what will the results be? Decide whether to trade before an important report by posting the list on the wall in front of you.
Traders would do much better to wait until the final release of the report rather than somehow taking unnecessary risks associated with the trading during volatile market reactions to yet reports.
Professional traders take a probabilistic approach to trading. There is no gambling involved. However, it is often a gamble to trade ahead of an important report since you cannot predict how the market will react.
How to Write and Construct Forex Trading Plans
6. Preparation of trade deals
Make sure you label major and minor resistance and support levels on the charts, set entry and exit signals to alerts, and make certain signals can be easily seen or detected with a clear visual or auditory signal.
It would help label major and minor resistance and support levels with whatever trading system or software you use.
7. Establish exit procedures
Common mistakes traders make to focus almost exclusively on looking for buy signals rather than paying attention to when and where to exit. For example, traders are usually reluctant to sell if they are down because they don’t want to lose money.
You will not succeed as a trader if you don’t learn to accept losses. Stops hit mean you were wrong. It doesn’t matter what you think. Professional traders still make money by managing money and limiting losses even if they lose more than they win.
It is important to know your exits before entering a trade. A trade always has two exits available. How will you deal with a loss if the trade does not work out? Record the loss. There is no such thing as a mental stop. In addition, each trade must have a profit objective.
You can sell a part of your position and then move your stop loss to the breakeven point when you have reached the breakeven point.
8. Specify entry rules
Exits are more crucial than entries, so this comes after the tips for exit rules. For example, if signal A fires, my stop loss is above my target, and we are at support, I buy X contracts.
Simple enough to allow for snap decisions, but complex enough to ensure efficiency! It will be very difficult (if not impossible) to make actual trades with 20 conditions, many of them being subjective.
A computer is a better trader than a person, which may explain why computer programs on major stock exchanges now generate most trades.
They were making a trade that didn’t require computers to think or feel good. All they have to do is meet the conditions. A trade is exited if it fails to meet the profit target or goes wrong.
After making a few good trades, they don’t become angry at the market or believe they are invincible. Instead, they make decisions based on probability, not emotion.
9. Document everything well
Many successful and experienced traders keep excellent records as well. They need to understand why they won a trade. It’s just as important to know what to do when they lose, to avoid making the same mistake twice.
Keep track of details such as targets, entry and exit dates, the time, support and resistance levels, daily opening ranges, and the market opens and closes for each day, as well as the reasons why you entered the trade and your lessons learned.
Your trading records should also be saved. By doing this, you can analyse the rate of profit or the average loss of a system, the number of total drawdowns (which occurs when the system makes a loss during each trade), the normal average trading time (which is necessary to calculate trade efficiency), and the rest of the important factors.
Furthermore, it is important to evaluate these important factors compared to the concept of a buy-and-hold strategy. Remember, this is the main business, and you have to act as the accountant. You want your business to be the most successful and profitable one possible.
10. Perform a performance analysis
A trading day’s success or failure depends largely on how well one understands why and how each trade was made.
Some trades will inevitably lose money. The goal is to develop a trading plan that will be profitable in the long run. It would help if you kept a trading journal that you could refer to in the future.
Mistakes to avoid when moving into forex trading as a beginner
Now let’s dive into a few major mistakes which you need to avoid when stepping into forex trading as a beginner:
1. News events and economic data are ignored
Currency markets are impacted by a range of events, such as economic reports and central bank decisions. There is no reason not to know when these events are coming because many follow a regular schedule. However, that does not mean it is easy to guess what will be announced or how the markets react.
While it is not suitable for all trading plans, trading on the back of a news event may be ideal for some. Of course, it would help if you kept tabs on news and events since these can significantly impact currency trends.
2. Looking forward to good trades
One of the worst mistakes new traders make when investing more money into a losing trade, hoping that a turnaround will happen. When you do this, you throw good money after bad most of the time, and you can exacerbate your losses.
You may indeed lose even if your investment hypothesis is correct because the price of your pair can move against you for a longer period than you anticipate.
In the same way, holding onto losing trades too long will prevent you from shifting your capital to trade with a higher chance of success.
3. Profiting quickly at the expense of larger gains
A forex day trader’s main objective should minimise losses and maximise profits. However, many new traders will limit their returns by taking profits too early, just as they hold onto losing positions for too long.
Initially, it may not seem like a massive mistake – you still made money – but doing so consistently will seriously harm your earning potential.
A trader can often close positions earlier than planned, for instance, if your pair unexpectedly enters a consolidation period or if some new information emerges to change the trend completely.
4. Insufficient research
Forex trading is a dynamic world built on interconnected dynamics. As a result, traders have opportunities and risks when economics, politics, and market fundamentals converge.
The potential gains on offer often tempt new traders to invest, but they fail to do thorough research. The result could be losing money.
On the other hand, successful traders try to read widely and regularly to keep up with future trends and stay informed of potentially market-moving events.
5. Lack of a trading plan
You need a trading plan if you want to become a forex trader. It is almost certain that your trading and money management will lead to losses without one. So make sure you sit down and create a list of rules before you begin.
The ability to trade successfully in a simulated market does not mean that you will do the same when you trade real money. Instead, traders gain confidence in the system they are using through successful practice trading, provided the system produces satisfactory results.
Deciding on a system is less important than developing the skill to make deals without second-guessing or doubting the outcome. It’s all about confidence.
You cannot guarantee that a trade will make money. It is based on the trader’s skill and system of winning and losing that determines their chances. It is impossible to succeed without losing. So if they enter a trade, the odds are in their favour because otherwise, they wouldn’t be there.
In other words, traders who let their profits ride and cut losses short will win the war, even if they lose some battles. Unfortunately, most traders and investors are not consistently profitable because they do the opposite.
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Heinrich is a forex and CFD enthusiast with a passion for writing good informative quality content. He strives to showcase the best forex brokers in Africa. Join him on his Journey!
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