What is a Forex trading plan and why is it necessary for every trader?

Most people are attracted to trading because they think it’s an easy way to make money. Soon they realize that the opposite is true. Trading consistently profitably requires a lot of work, dedication and upfront capital investment.

Each trader has a unique trading style, level of experience, approach, resources, and mindset. Therefore, a trading plan developed by one trader might not work for another. This is why it’s so important for beginner traders to learn how to make trading plans for themselves. A well put together trading plan can turn losing trades into winners and save them a lot of money, energy and time. In this guide we’ll discuss the benefits of a trading plan and how to create one for yourself.

Benefits of trading plan

When traders follow their plan, there’s very little room for making illogical trading decisions. Decision making is more structured and it’s easier to execute trades. You can save a lot of mental energy when you have clear rules for entering and managing trades. Having a trading plan improves your discipline. What’s more, trading plans reduce the possibility of blowing up your trading account.

How to prepare for trading

Preparation is the key to success in Forex trading and developing a forex trading plan is an absolute must. Before you start the trading journey, you should first have a clear understanding of what you are getting yourself into and what to expect.

Expectations

What are you expecting from this endeavor? If the answer is turning a thousand dollars into 100,000 in a year, you should change your expectations as while it’s theoretically possible to do so, it requires taking huge risks and most likely will result in a blown-up account. To make money trading, you need upfront investment. However, it is not recommended for novice traders to take that risk as they are still developing as traders and it’s best to start with a small amount. A beginner trader should not be planning to make money, his or her goal should be to become consistently profitable. When a trader is consistent, the money follows. However, it’s important to note that not all months will be profitable. There are drawdown periods for every profitable trading system. And therefore, before starting to trade, you should create an emergency fund.

In addition, trading may become boring at times when the market doesn’t give you any trading opportunities. You should be prepared accordingly for such periods as well. Having a side job or a business can be very helpful during dull trading periods.

Decide what kind of trader you want to be

Before creating a forex plan that works, you should first answer the following questions: what kind of trader are you? There are many different sorts of traders. Some trade the news, some day trade, some use trading algorithms and others position trade.

Are you a technician or a fundamental trader? Or maybe a mixture of the both worlds? Technical traders base their decisions on analyzing the charts. Fundamental traders base their predictions on market news and political news. In addition, there can be found traders that use both technical and fundamental analysis in their decision making process. It’s difficult to choose your style of trading when starting out. The best way to approach it is to learn as much as you can on Forex and later choose the methods that make the most sense to you.

How to create a forex trading plan

As you choose your trading style, the next step is to learn everything you possibly can about that style and develop your own trading plan accordingly. Below we discuss the most important aspect that you need to take into account when creating a trading plan.

Choose your trading session and trading hours

Forex trading takes place 5 days a week from Monday to Friday and the markets are open 24 hours during the weekdays. However, not all of the trading sessions offer the best liquidity. High liquidity is a good thing for traders as it reduces the spreads, produces good movements and opportunities for traders. There are 3 major trading centers that offer the best liquidity on the market when they are open:

• Tokyo – open from 12:00 AM to 9:00 AM UTC
• London – open from 7:00 am to 4:00 pm UTC
• New York – open from 1:00 pm to 10:00 pm UTC

In addition, open markets often overlap with each other and when that happens, liquidity increases further. For instance London and New York overlaps are considered the most liquid periods.

When you are planning your trading hours, you should also plan how much time you will spend on trading per day. Some traders avoid the most active trading sessions, wait for the trends to establish and enter the markets to trade closing sessions. Planning your trading time can also help your trades become more structured. If you are someone that constantly checks on open positions using mobile apps that intervene with your life negatively, you can become a day trader and open and close positions within a day. That way you’ll be able to protect your sleep and rest time from worries about ongoing trades.

Choose your trading instruments

Another important issue to take into account when making a trading plan for forex is that each trading instrument is unique and selection of the ones that work best for you is not easy. However, the following Major currency pairs truly deserve a place in your portfolio since they are the most liquid:

• EUR/USD – Euro vs US Dollar
• GBP/USD – British Pound vs US Dollar
• USD/CHF – US Dollar vs Swiss Franc
• USD/JPY – US Dollar vs Japanese Yen
• USD/CAD – US Dollar vs Canadian Dollar
• AUD/USD – Australian Dollar vs US Dollar
• NZD/USD – New Zealand Dollar vs US Dollar

Find a trading strategy that works for you and test it

Your plan should also include the trading strategies that you are going to use during trading. Depending on your preference, you can find a lot of chart patterns, indicators and tools for fundamental analysis on the internet. Before using any strategy, it’s wise to test it first on your preferred trading instruments. As already mentioned, not all of the currency pairs have the same movements on the chart. Some of them are more volatile than others, some have more liquidity like major pairs and some are highly correlated with other currencies or commodity prices.

Define your risk to reward ratio

In the world of finance, risks and rewards are positively correlated. The larger the risks, the higher the potential rewards. However, overextension of risks can easily lead to increased losses. Taking large risks such as trading using a high leverage, increasing your position sizes and choosing trading setups that offer less than 1:1 risk/reward ratio can result in high losses. Your trading plan should include well defined risk levels in percentage points in order to keep you from making too large risks. For instance, professional traders usually risk 1% of their capital per trade. On rare occasions when the setup looks too promising, a trader might risk 5% of his/her capital. But 5% is the maximum number. Planning in terms of percentage points instead of sheer numbers can help you manage almost any account balance.

Define your short, medium and long term goals

In life people succeed because they know where they are going. The same is true in Forex. It’s important to define your short, medium and long term goals to create a good forex trading plan. Ideally your long term goal should be to remain in the business of trading. Short term goal should be to protect your capital and medium term goal should be to increase your balance gradually. As you increase your account balance, you’ll notice that more money helps you make more money when you are trading in terms of percentage points. In investing, this phenomenon is known as compounding. Compounding is a reliable, tried and true method of getting rich. On the donside, it takes time to reinvest your profits.

Set limits to yourself

Setting limitations in your trading can make the process much simpler for you. Limits can save you from overtrading and revenge trading and as a result, keep your account balance from blowing up. A successful trading plan in forex prevents you from placing any new orders on a losing day when losses approach a certain percentage of your account balance. For example, let’s say your daily limit is 100 USD, after losing that amount, you will not place any new order that day. You will have time to analyze what happened, calm yourself and plan your trades better in the future. We have to accept that losing is a part of the process. In addition to daily stop losses, professional traders use drawdown limitations as well. For example, if their account balance losses are 10%, they stop trading for a certain period and start analyzing what went wrong.

Analyze your trading periodically

Developing a forex trading plan is difficult and it requires updating as market conditions change.

Your trading plan should include the means for analyzing your performance. It’s a good idea to have periodic reviews of your trading plan for forex. For instance, at the end of every month or every week traders should revisit the trades and check how effective their trading strategy is. Revaluate the reasons for entry, exit and final outcomes constantly to build a forex trading plan that works.

Learn from your mistakes and improve your trading plan

Analyzing your trading and learning from your mistakes is essential. But how exactly can you do that? Starting a trading diary can certainly help. The diary should include the reasons for entering the trade, the reasons for exit, time and date, results and predictions. In addition, to the technical information, you should also include the way you feel. For instance, in case you are feeling tired or sick and trading results turn out to be bad, you might find the correlation when you start analyzing your past trades.

The main takeaways

To sum everything up, developing a trading plan is an absolute necessity when it comes to trading consistently profitable. Successful traders plan their trades and trade their plans. A well put together plan can make decision making much easier for you. You will gain more confidence and discipline in the process of following the clearly defined rules. Before creating a trading plan, you should make sure that you have healthy expectations and know what kind of trader you wish to be. Trading plan should include trading hours as well as how much time you will spend on the process, you should also have defined trading instruments and means for scanning the markets for trading opportunities. A good forex trading plan should also include trading strategies, risk management, and regular performance analysis at the end of a certain number of trading days.

FAQs on Forex trading plan

What should be in a forex trading plan?

Your forex trading plan should include:

• Time management, what part of a day will you be trading and analyzing the markets.
• Types of trading instruments that you are going to use
• Your trading strategy that includes technical or fundamental tools for predicting the future price. It’s important for your strategy to provide you with an edge and to fit your personality.
• Well-defined risk to reward ratios. Daily and drawdown stop losses.
• Means for analyzing your trading results.

How do I create a forex plan?

The best way to create a Forex trading plan is to learn as much as you can about trading. There are many kinds of traders and you should find a trading style that best suits your personality. Once you have that covered, you can start creating a trading plan around it. Trading plan should consist of time management, risk management, trading setups and trading instruments.

What is an example of a trading plan?

A Forex trading plan example would be similar to this:

• Only trade Major currency pairs.
• Do not leave trades overnight.
• Open positions only during London and New York sessions.
• Position trade and be very selective. Trade candlestick chart patterns.
• Only trade in the trend direction.
• Never risk more than 1% of your account.
• Stop trading for that day if you lose up to 3% of your account balance.
• Make notes in your trading diary and analyze data at the end of each month.