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 precisely 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 trading hours
- Use stops and limits
- Identify currency pairs to trade
- Forecast turnover rates
- Readjust your trading plan
- Know the regulations where you are trading
- Take care of the details
A plan is useless if it is not implemented. 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, you must 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. If you are a total beginner, for example, advanced options strategies might 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 picking a handful of markets to focus on from the get-go.
As you gain confidence, you can always come back and change your plan.
Why do you trade? If the answer is simply “to make money” then you may not have given this enough thought.
Maybe you want to get a little extra for your retirement, start a new career, or free up time to spend with friends and family. Whatever your end goal, 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 back. Consider where you want to be in ten years and set ten annual milestones that will get you there.
Strengths and weaknesses
You will want your trading plan to leverage your strengths and mitigate your weaknesses.
For example, you may need to constantly monitor your open positions, which can be tricky if you hold trades overnight. You can remedy this weakness by sticking to day trading or using notifications and alerts to track trades without always monitoring your trading platform.
You’ll 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 have laid out your expertise, goals, strengths and weaknesses, you should be able to identify the trading style that suits you best.
If you’re aiming for long-term returns and don’t want to spend too much time each day opening and closing positions, for example, 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 funding, you might want to consider day trading.
Want to know more about trading styles? Start the course on Forex trading styles.
3. Pay attention to trading hours
Although forex trading is a 24/5 activity, there are standard peak times of increased activity.
When the London and European markets open, for example, volume intensifies as institutional traders move the forex markets. Then, once the New York session opens, the volume of forex trading increases again.
There is a lull between the closing of the New York markets and the opening of the Sydney session. When trading volume decreases, spreads may widen, markets may stagnate, and the fills you get may not be as accurate.
You could be in danger of trading noise when the forex markets have little direction. If your plan isn’t working as it should, it may be because you’re trading at the wrong time.
Read also » Forex Market Time » When is the best time to trade?
4. Use stops and limits
The fast nature of forex means that stops and limits are highly recommended for every trade.
As we covered in the course, it’s often a good idea to outline your maximum risk on any opportunity under your plan. Next, be sure to use a stop loss to minimize your risk, as well as a limit to your profit target.
You may also want to 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 may want to assign the currency pairs you want to trade. Major currency pairs tend to have the tightest and most consistent spreads, in part due to trading volume.
Developing trading methods and strategies built around the majors allows you to focus your attention on a few pairs rather than looking to match your technique across a wide range of currency pairs. You can also adjust your economic calendar to isolate medium and high impact news relating exclusively to major currency pairs.
As they are traded in pairs, many forex markets are highly correlated, which means that if one moves, chances are the other will too.
One of the most referenced forex correlations, for example, 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, a major move could affect all of your trades equally.
6. Plan turnover rates
When you trade forex, you are borrowing one currency to buy another. Rollover is the interest charged or earned for holding positions overnight. Rollover interest charges are calculated based on the difference between the two traded currency interest rates.
For EUR/USD, if the 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. Readjust your trading plan
During your first few months of live forex trading, you will encounter various market conditions and events. Your trading plan might work well for some of them, but not for others.
This is why adjusting your trading plan as you go is such a good idea. You can learn from your mistakes, build on your successes, and ensure that you always adapt. Many successful traders keep a trading journal to track daily gains, losses, emotions, and market conditions.
8. Know the regulations where you trade
Regulators determine the leverage and margin you can use to trade in the forex markets. These rules impact the currency pairs you can buy and sell and the account size you can manage.
Most of forex brokers credible companies ensure they have regulations in all areas where they operate and where their customers are based. FOREX.comfor example, works with regulators in all the countries we cover.
Read also » Top of the best regulated forex brokers in Quebec and Canada
9. Take care of the details
The final step when creating a successful forex trading plan is to add as much detail as possible. Indicate precisely on which markets you will 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 helpful reminder to use in practice. It helps define the path you have chosen and reinforces the reason you are trading. 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 precisely 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 at a minimum, it should cover your:
- Reasoning behind every transaction
- Target profit and maximum loss
- Input and output levels
- Emotions when entering and exiting the post
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 forex 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 which may result from the fact that anyone relies on such information.