What is a Forex Trading Plan?
If we were to ask many forex traders what their trading plan is, a popular answer would be “to make successful trades and profit!” Certainly, every forex trader wants to earn a profit, but that answer is more wishful thinking than an actual plan.
In order to reach your destination on a journey, you need to have a plan as to how you will arrive there. The forex trading road is no different – in order to reach your goal of being successful, you must have a trading plan in forex, which contains your trading strategies and rules. Developing an easy to use trading plan and adhering to it whenever you execute a trade is invaluable to becoming a successful trader.
A trading plan for forex can be viewed as your GPS for your trading activity. Of course, a trader should make use of the resources on the internet, which provides helpful tips on how to become a successful forex trader. However, a forex trading plan is your own, personal plan. It is geared to your goals, risk attitude and available capital. Keep in mind that a trading strategy (sometimes called a trading system) is not the same as a trading plan. A trading strategy is a precise instruction as to how you should enter and exit trades, such as “buy EUR/USD at 1.18 and sell at 1.20”. Your trading plan will include trading strategies, and much more, as we shall discuss.
Why do you need a Trading Plan?
As a successful forex trader, it is very important that your trades are based on logical decisions rather than emotional ones. Even experienced traders face potential trades where, in the heat of the moment, there is a temptation to “trade from the heart, rather than the head”. Needless to say, an emotional trade is never a good idea and can cost you in the form of losing trades. A successful trading plan will help you avoid the pitfalls of an emotional trade and ensure that your trades follow (your) pre-set parameters for forex trading.
By adhering to your trading plan and removing the emotional component from any trades, your trading decisions will be more objective when it comes to taking profits or cutting losses. As well, you will develop a trading discipline, which is one of the most important tools in becoming a successful trader. Trading discipline does not mean that you must blindly follow a plan – rather, you will be able to see over time which trades have worked and which have not. By keeping a record of your trades, you will be able to learn from mistakes and improve your strategies, as part of your trading plan.
How to create a Trading Plan
A crucial step for any business is to create a written business plan. Forex trading should not be treated differently than any other business, which means that you need to have a written forex trading plan; otherwise, you reduce your chances of being a successful trader. We have already mentioned that your forex trading plan will be custom made to fit you since you are the one designing it.
Your trading plan should have a written description of how you plan to trade in the market. As we discussed, this plan is your guidebook or GPS to trading – treat it as the key to your success as a trader! This means not just putting in the time to write up a detailed plan, but also sticking to the plan when you trade.
If you are thinking that creating a trading plan seems a bit overwhelming, don’t worry! Keep in mind that many, if not most traders make the mistake of not making a trading plan, so you already have an edge on every one of them, just by having a trading plan. Your forex trading plan need not be overly complicated and lengthy. In fact, an excellent trading plan can be short and clear-cut, with simple trading rules for you to follow. The easiest way to approach this is to start with an outline.
Forex Trading Plan Outline
In the outline, we will begin with your overall trading goals. Ask yourself what are your goals when you trade forex. What kind of trader are you? For example, are you a conservative, cautious trader, looking to make the best trades and settle for small profits? Or, are you more of a risk-taker, willing to take on higher risk for the chance of higher gains?
Once you have written down the answers to these questions, you have completed the first part of your trading plan – well done!
Forex Trading Plan Template
As we’ve learned, the beauty of your forex trading plan will be tailored to suit your goals and trading strategies. However, you needn’t create the wheel. Let’s take a look at a trading plan template that you can use to develop your own forex trading plan.
Let’s review this example of a forex trading plan – this template can be used in order to develop your trading plan.
Quick outline of your trading plan – summarize your trading goals and trading style.
Trading routine – list your time frame and which trading sessions (e.g. 1-day time frame, US market)
Trading strategy – the size of your trade and type of asset (e.g. 10,000 EUR/USD)
Money management – the risk per trade, entry and exit strategies (e.g. stop-loss method)
That’s it! You now have a brand new forex trading plan. As we have mentioned, the trading plan needn’t be a long document – the example above is a simple forex trading plan, just a single page in length. As you gain more experience in forex trading and determine which methods and strategies are working for you, you will likely make changes to your forex trading plan. Don’t feel confined to this forex trading plan example – any items that are relevant to your forex trading can be included in your trading plan.
There’s one final step to take, and that is the trading plan checklist. The trading plan contains your overall strategy and the rules you have put in place. The checklist is a series of questions which you should answer in writing. In this manner, the checklist helps you make sure that you follow the rules of your trading plan every time you trade.
Here is an example of a trading checklist:
We suggest that you create your trading plan and trading checklist in a PDF format. This will enable you to easily locate these documents on your computer. As well, you can easily make changes to the plan or the checklist. For example, you may decide to change the currency pair you are trading or the time frame of your trades. You would simply create a new PDF document which incorporates these changes. You may wish to browse the internet and review forex trading plan examples pdf, which will help you determine what items to include in your forex trading plan.
In order to be successful as a forex trader, you need to be clear on your goals as well as what strategies you will utilize whenever you trade. This means that you need to create a guidebook which will act as your GPS whenever you trade on the forex markets. The best way to do this is to make a forex trading plan. This plan is tailor-made for your trading goals and styles, and as such is an indispensable tool for the forex trader. In addition to a successful trading plan, having a trading checklist ensures that you follow the rules and strategies in your trading plan whenever you trade.
The Platinum Formula:
Perfect Fundamentals + Perfect Technical Analysis + Perfect Logic + Perfect Risk Management = Perfect Trade
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Hopefully, you have enjoyed today’s article. Thanks for reading! Have a fantastic day!
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