Some believe that social media romanticizes trading by showing only the good parts of the life of a trader. A trader who is always having fun and making money by snapping their fingers. That part might be rightly exaggerated. But if you pay more attention you will always see that they have a whole bunch of books, notes, notebooks, and papers on their desks. This is because no one, not even the best traders, can trade without a proper trading plan in forex.
If you have not been able to experience the same level of success in trading, then a well-designed trading plan is just the missing piece of your forex trading puzzle.
In this article, we will define what a trading plan is, what are its advantages, in other words why it is so necessary for forex traders, and lastly we will show you how to build your own trading plan in forex.
What Is a Forex Trading Plan?
Essentially, a forex trading plan is a comprehensive and extensive approach toward trading and how to carry out trades. It is a thought out and well-structured system of trading that you develop based on your preferences, experiences, market conditions, and various analyses.
It is only through having a stable trading plan that you can have a sustainable, long, and successful trading career. And this is exactly how you can turn trading in forex into an actual profession or career – through sheer discipline, by developing a comprehensive approach and following it strictly.
Now let’s see why we strongly recommend that you develop your own forex trading plan.
Why Is Having a Trading Plan Important in Forex?
Let’s be honest, having a strict disciplinary approach is difficult. Developing discipline is not easy. You need to be convinced of its actual benefits in order to put your whole heart into it. So here is a full list of the advantages of having a trading plan in forex:
- Trading with a plan makes things easier on you. It is kinds of like trading with a bot, because you also have a pre-defined approach that you need to stick to. However, the difference is that the bot does not execute the plan, you do.
- Along similar lines, having a trading plan can remove a lot of biases from the equation. Since you need to follow your rules and plan no matter what, it prevents you from making emotional decisions.
- Having a trading plan will create accountability for you as a trader. It will create a disciplined path so you know where to go and how to go there. As an accountable trader, you will have no choice but to put in the time and effort.
- In addition to pushing you forward to trade more, a trading plan will also keep your losses in check. Since one of the most important pillars of any trading plan is a well-defined exit point.
- Lastly, a trading plan will give you the ultimate competitive edge in the market. There is nothing to do but to prepare. Therefore, the more you prepare, the better your chances will be.
Now we will show you step by step how you can develop your own trading plan in forex.
Develop Your Own Forex Trading Plan Step by Step
And now for the moment of truth, it is time to develop a sound and reliable trading plan to take your forex trading to the next level.
Conduct a Full Self Evaluation
The first step is to carry out a full and complete self-evaluation. This would entail an analysis of your skills and knowledge with regard to forex trading. You need to know exactly where your strengths are as well as your weaknesses. In addition to finding out and jotting down everything about yourself as a forex trader, you also need to specify all the goals you have in mind. Are you looking for a side hustle? Or for a new career? Or just a bit more savings? These are all important questions that need to be answered in the first step.
Pick a Suitable Trading Style
The second step is to pick what trading style you want to have. This is very important, because whatever trading style you choose will ultimately impact and define the other details of the trading plan. So it is important to pick the most suitable trading style depending on your skills and goal. Do you want to be a day trader, swing trader, scalper, position trader, etc.?
Choose the Time of Your Trading
Although this part largely depends on your trading style, there are generalities that need to be specified in advance. Whatever trading style you choose, you also need to know how much time you want to put into trading and when exactly? Obviously, when some forex sessions are up and running, such as the London session or the New York session, the market has a higher degree of trading volume and liquidity, thus being more suitable for almost all trading styles.
Specify Stop Loss Limit
It is very important to specify the most or maximum amount that you want to risk. In this step you need to clarify what is the threshold for loss that you can sustain without incurring too much loss that would push you out of the game. So this is when you set the stop loss limit for your trading plan, and you can even set a stopping point for yourself where you would stop if you lost more than a certain percentage in a given day.
Which Pairs to Trade?
Now you need to actually choose which pairs to trade. This will also depend upon your trading style and your goal from trading in forex. Be careful which pairs you pick because this could be very influential in the outcome of your trading. When picking the trading pair, it is also a good idea to keep in mind the amount of trading volume for each pair. Because the higher the trading volume is, the more liquidity that pair offers. And naturally a higher liquidity equates to more opportunities for various trading styles. For example, the trading pair EUR/USD has an incredibly high trading volume, among others.
Also Read: Currency Pairs
Implement, Adjust, Repeat
A general plan of action should be ready at this point to test out in open waters. Make sure to start small with a real account or even test your plan in a demo account first. Whatever you choose, your trading plan needs to be implemented to see how it performs. Then as you move along, your plan must be adjusted and perfected.
Having a trading plan in forex is almost universally recommended by all seasoned and experienced traders. A plan can light the way and show you the path forward. Having such rules can provide you with the much needed trading discipline that will ultimately lead to sustainable and lasting profits in forex.