Forex traders should make a trading plan and trade accordingly if they are to increase their chances of being a successful trader in the long term. Trading with an established and well thought out plan has many benefits especially when compared to trading without one. Amongst these benefits, a solid trading plan can help prevent you from using inconsistent money management and trading out of negative emotions.
Why do you need a forex trading plan?
If you are a trader who trades forex online without a plan, it could be considered similar to trying to row a boat with no paddles. You don’t only need to develop a forex trading plan; you should always try and trade according to the plan. A well thought out trading plan can be the difference between long term success and failure.
With your trading plan, you can make trading decisions based on pre-set parameters and avoid trading with emotions. Whatever your experience level, a trading plan should always be implemented that suits your individual goals and trading style.
Benefits of trading forex with a plan
There are many positive benefits to having a good plan in place when you are trading forex. These benefits can include:
- Having a clear understanding of the trading strategy with a set of criteria for placing a trade and exiting trades
- Can help eliminate emotions that have a negative impact on decision making
- The trading plan eliminates your chances of guessing during trades and helps to make a more informed decision
- It frees your mind to carry out detailed fundamental market research and technical analysis
- Allows you to trade with consistent money management
What to include in your forex trading plan?
A well though out forex plan should contain your goals and how you intend to achieve these goals through your trading. The most common features of a solid trading plan include technical factors that need to be met for you to initiate trade positions together with conditions that must be met for you to exit the trade, either to take your profit or to limit losses if the trade becomes unfavorable.
The forex trading plan needs to include a position sizing technique and a minimum risk/reward factor for every trade. I would always try to develop a plan with a positive risk to reward ratio of at least 1:3 where a winning trade is 3 times greater than a losing trade. I would therefore only take trading opportunities that present such an opportunity. You should of course only use a position size that is suitable to you and never risk more than you can afford to lose as trading online will always carry an element of risk.
A good trading plan needs to take every market condition and eventuality into consideration without leaving any guess work. Ideally the plan will be memorized but it should also ne noted down and readily available for reference if need be.
Amongst the essential features of a good forex trading plan are:
- Trading strategy including entry/exit criteria
- Technical, fundamental, sentiment and any other market analysis used
- How much you are willing to risk per trade/day/week/month
- The size of your positions relative to the account size
- Risk and reward you want to use for every trade position
- Levels for stop loss, take profits, break even and trailing stop (if applicable)
- Clear money management strategy
- Good trading discipline by controlling emotions such as fear, anger and greed
- The market hours that you plan to trade
- Profit target or maximum loss before you stop trading for the day
These are some of the core factors that should be implemented within a forex trading plan but you an of course add and amend elements according to you individual trading style and goals. It should be unique to you as everyone is different and what works for one trader may not work for another.
Set your trading goals in your forex trading plan
It is imperative to have a clear vision on your overall trading goals before you commence trading as this is what your trading plan will be built around. It will technically be the blueprint which can outline how you plan to achieve these goals. This can also help to give you the direction and confidence you need to be a consistent trader.
Trading goals can be broken down into short, mid and long term. Just remember, there is no overnight solution to becoming a successful trader. It can take years of practice to produce results on a consistent basis whilst requiring immense patience and discipline.
You can always trade on a demo trading account with a forex broker if you wish to practice your trading plan and strategy until you feel confident enough to open a real account.
The obstacles to a successful forex trading plan
Whilst forex trading can have many obstacles already, you ideally would not want to create a trading plan that causes more. There are many things that may make your trading plan fail so it can be useful to be aware of what these are and to plan accordingly. This can include poor money management, lack of market analysis, risking too much, over trading and more.
Furthermore, one of the key things that can cause even the best trading plans to fail are a trader’s psychology. You should always try to keep your emotions and discipline in check. You wouldn’t want negative emotions such as fear, greed and anger to get in the way of your plan. The best plans in the world might not work if they are not adhered to.
Lack of discipline can even make you lose in a trade that would have been otherwise successful. When you lack the required discipline, you may be tempted to stay in a losing trade longer than required and trade against your trading plan. To be a professional and expert trader, you should always try to stick with your trading plan irrespective of the market situation.
Summary of a good forex trading plan
Hopefully you now have an idea on some of the key things to consider when creating a good forex trading plan and you can implement them into a plan that is unique to your individual goals. If you can produce a good trading plan then you can increase your chances of being a consistent trader whilst being able to trade with confidence and a clear understanding of what actions you take.
In order to start trading forex online, you will need an account with a forex broker. If you are looking for a broker, you may wish to check my best forex brokers page.