How to Create a Forex Trading Plan
A trading plan is especially important for forex currency traders.
When the markets are at their most stressful, you don’t want to have to rely on your judgment alone. With a trading plan in place and written down, it will be much easier for you to stay focused on your trading goals. A plan tells you exactly what to do so you can maintain discipline and consistency while controlling losses.
Use the guide below to plan and write a 9-step forex trading plan.
- rate yourself
- Choose your trading style
- Pay attention to opening hours
- Use stops and limits
- Identify currency pairs to trade
- Forecast turnover rates
- Adjust your trading plan
- Know the rules where you shop
- Pay attention to the details
A plan is useless if it is not carried out. Many make the mistake of investing a lot of time in creating a strategy, only to abandon it when they start trading the markets.
1. Assess yourself
To build a trading plan, first take a step back and assess your market expertise, goals and weaknesses. After all, you want your plan to be as tailored to you as possible.
Start by assessing your knowledge of the markets to make sure you don’t lose your mind. For example, if you are a complete beginner, advanced voting strategies may not be a good place to start.
It’s also a good idea to identify the asset classes you’re most comfortable with and consider choosing a handful of markets to focus on from the start.
As you gain confidence, you can always go back and change your plan.
Why are you shopping? If the answer is simply “to make money”, then maybe you haven’t thought enough about this.
Maybe you want to get a little extra for your pension, start a new career or free up time to spend with friends and family. Whatever your end goal is, make sure your plan is designed with your motivation in mind.
One of the best ways to do this is to start with your end goal and work backwards. Consider where you want to be in ten years and set ten annual milestones that will get you there.
Strengths and weaknesses
You want your trading plan to capitalize on your strengths and mitigate your weaknesses.
For example, you may need to constantly monitor your open positions, which can be difficult if you hold trades overnight. You can mitigate this weakness by sticking to day trading or using notifications and alerts to track trades without always monitoring your trading platform.
You will learn more about your strengths and weaknesses as you progress, so be sure to review and modify your plan periodically.
2. Choose your trading style
Now that you’ve laid out your expertise, goals, strengths and weaknesses, you should be able to identify the trading style that suits you best.
If you aim for long-term returns and don’t want to spend too much time each day opening and closing positions, position or swing trading may be right for you. Or if you plan to trade full time but want to avoid paying day-to-day financing, consider day trading.
Want to learn more about trading styles? Start the course on Forex trading styles.
3. Pay attention to opening hours
Although forex trading is a 24/5 activity, there are standard peak times of increased activity.
When London and European markets open, for example, volume intensifies as institutional traders move the currency markets. Then, when the New York session opens, the volume of currency trading increases again.
There is a break between the close of the New York markets and the opening of the Sydney session. When trading volume decreases, spreads can widen, markets can stagnate, and the fills you get may not be as accurate.
You may be at risk of trading noise when the forex markets have little direction. If your plan is not working as it should, it may be because you are acting at the wrong time.
Also read ” Forex Market Time » When is the best time to trade?
4. Use stops and limits
The fast-paced nature of forex means that stops and limits are highly recommended for any trade.
As we covered in the course, it’s often a good idea to outline your maximum risk for each option under your plan. Next, make sure you use a stop loss to minimize your risk, as well as a limit for your profit target.
You can also consider setting up a personal circuit breaker – for example to prevent you from trading if you reach a daily loss of 5%.
5. Identify currency pairs to trade
In your trading plan, you might want to assign the currency pairs you want to trade. Major currency pairs tend to have the tightest and most consistent spreads, due in part to trading volume.
Developing trading methods and strategies built around the majors allows you to focus your attention on a few pairs instead of trying to match your technique across a wide range of currency pairs. You can also adjust your financial calendar to isolate medium- and high-impact news that concerns only major currency pairs.
Since they are traded in pairs, many forex markets are highly correlated, meaning that if one moves, chances are the other will too.
For example, one of the most referenced forex correlations is between the EUR/USD and USD/CHF pairs. This is actually a negative correlation: when one pair goes up, the other tends to go down and vice versa.
Knowing the correlations is useful for managing your risk and your capital. After all, if you have several similar positions in closely correlated pairs, one big move can affect all your trades equally.
6. Plan turnover rates
When you trade forex, you borrow one currency to buy another. Rollover is the interest charged or earned for holding positions overnight. Throughput interest costs are calculated based on the difference between the two exchange rates traded.
For EUR/USD, if swap rates were 0.817/1.28, on a 10,000 long position, you would be charged $1.28 to hold the position overnight. If you sell 10,000 EUR/USD, you will receive $0.82 overnight.
7. Adjust your trading plan
During your first few months of live forex trading, you will encounter different market conditions and events. Your trading plan might work well for some of them, but not for others.
Therefore, it is a good idea to adjust your trading plan as you go. You can learn from your mistakes, build on your successes and ensure you are always adapting. Many successful traders keep a trading journal to track daily gains, losses, emotions and market conditions.
8. Know the rules where you shop
Regulators determine the leverage and margin you can use to trade the forex markets. These rules affect the currency pairs you can buy and sell and the account size you can manage.
Most of forex brokers trustworthy companies ensure that they have rules in place in all areas where they operate and where their customers are based. FOREX.comfor example, working with regulators in all the countries we cover.
Also read » Top of the best regulated forex brokers in Quebec and Canada
9. Pay attention to the details
The final step in creating a successful forex trading plan is to add as much detail as possible. State exactly which markets you want to trade and when. Decide how much capital to allocate to each position, as well as the location of stops and limits.
A checklist can be a useful reminder for use in practice. It helps define the path you’ve chosen and reinforces the reason you’re acting. Ideally, your checklist should cover all stages of finding opportunities, opening trades and managing open positions in the market.
Trading Plan Checklist
Finally, consider keeping a trading journal. This lets you see exactly how your trading journey is progressing, so you can identify your strengths and weaknesses, eliminate mistakes and build on successes.
Your trading journal can be as detailed as you want. But it should at least cover your:
- Reasoning behind each transaction
- Measure profit and maximum loss
- Input and output levels
- Feelings when you entered and exited the station
A trading journal can also help you see if you are trading regularly. If you can make sure you are consistent with your trading strategy, you can see where it is going wrong and adjust it accordingly.
By FOREX.com » Official Site
Disclaimer: The information and opinions contained in this report are provided for general information only and do not constitute an offer or solicitation to buy or sell foreign exchange contracts or CFDs. Although the information contained herein has been obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness and assumes no responsibility for any direct, indirect or consequential damages that may arise as a result of any reliance on such information.