What Is A Trading Plan, And Should You Have One?
Your trading plan will be unique to you. It will depend on many factors like your Forex experience, personality, and mindset. Some traders are more risk-averse than others. You might trade the five-minute timeframe, and other traders might trade the daily chart. One plan cannot work for both. So, that said, let's break down what we mean by a Forex trading plan.
You know that trading Forex can be challenging for a novice trader. There’s a lot to learn. It’s easy to feel overwhelmed. So, this is where a trading plan will help you to become a successful Forex trader.
This guide aims to provide you with food for thought rather than giving you a cast-iron trading plan. Why? Well, because a trading plan is subjective. It has to be specific to YOU. What works for Bob might not work for Lucy. So, we’ll give you some basic ideas, principles, and concepts, which you can then develop into a unique and personal trading plan. Our job is to educate you so you can make your own decisions when you are trading Forex.
Firstly, there is no fail-proof system. If you come across a company offering you a guaranteed trading system, listen out for screaming alarm bells. You know the type of advert, ‘John made £4,500 in his first trade following our proven system’. They don’t tell you how much John risked or how large his capital is. If you are asking these questions at this stage of the guide, give yourself a gold star. Most people have tried and failed following the advice of ‘trading gurus.’ The common denominator for these ‘guaranteed’ systems is that they all fail spectacularly at some point.
We’re going to give you practical advice that you can get your head around, so you can make an efficient, easy to follow Forex trading plan.
What Are The Bones Of A Trading Plan?
Let's imagine you are heading off on an exciting adventure in your car. You jump in and drive to the end of the road and then. Oh, where are you going? Then you find yourself in the middle of the heaviest traffic. You can’t get out of the junction. Cars and Lorries are whizzing past, and they’re not going to let you out onto the road. After all, you aren’t sure which way you're going, are you?
Now, there you are, looking at a busy chart. How on earth do you know where to go? You don’t know what you’re looking for, and if you do get into a trade, you have no idea where to get out. Novice traders often feel like a deer in the headlights. They have no plan for entering and exiting a trade. This situation is a recipe for failure, and we know you are better than that. Because we believe you are serious about becoming a successful Forex trader.
Planning Your Forex Trading Journey
All trading plans are rules-based. Even if you don’t like rules, the benefits of applying them in Forex trading are ten-fold. Coming back to the driving analogy, you know which side of the road you have to drive on. You stop at red traffic lights and go ahead with green traffic lights. Great, this is the basis of your plan.
You will find having a plan makes it easier to trade. You relinquish doubt when you KNOW what you are looking for on the charts. You can make more objective decisions on entry and exit points, which aids with self-discipline. Having a trading plan stops the emotional angst that most new traders’ experience.
You must apply these two vital rules for your trading plan:
- Rule One – Every position MUST have a stop loss
- Rule Two – The maximum loss on any position must be 1% (or the percentage you decide upon that doesn't put your account at risk)
You must apply these rules to EVERY trade. Why? Because, you must protect trading capital at all times. So, let's break down what you need to formulate your plan.
How Much Time Do You Have For Trading Forex?
Do you have a full-time job? If so, your trading plan will be different from if you could focus on the charts all day. Decide when and how much time you can devote to trading. For instance, you could check the charts at 10 pm after the US close. You can spend an hour doing your analysis and highlighting potential areas for a trade entry. If you have less time, swing trading or day trading would be the better options. You are likely to be unsuccessful at scalping the market if you are short on time.
Why Are You Trading?
If your goal is to get rich, you are likely to fail. This attitude is the downfall of many novice traders. You’ll quickly come to appreciate the challenges of being new to Forex. Professional traders have spent years getting it wrong, losing money, and wondering if they will ever get it right.
What Is Motivating You?
Do you have a vision of retiring from your Forex profits? Or do you want to make a little extra money each month? Or perhaps you feel compelled to master Forex trading so you can become one of the 5% of successful traders. Work out what your motivations are. So if trading gets hard, you can remind yourself to keep going.
What Are Your Strengths And Weaknesses?
Play to your strengths and improve upon your weaknesses. For instance, you might be getting into trades too soon because FOMO takes over. Or you might be continually checking open trades – this is a common rookie mistake. Use this self-knowledge to make improvements to your trading plan.
What Are Your Goals For Trading?
For instance, a goal could be an aim to generate 1% a day or 5% a month or 20% over a year. The numbers don’t matter. It’s your choice as long as expectations are realistic. Or you might focus on becoming a better trader. Each week, you say to yourself, ‘This week I am going to get better at being patient, waiting for the right moment in the market for me to take a trade”.
Are your trading goals aligned with your capital? If you only have a £100.00 trading bank, it’s going to take a long time to start generating an income from trading Forex.
What Is Your Attitude To Risk?
In Forex trading, a healthy attitude to risk will save you countless hours of anxiety. If you’re agonising about open trades, you may have risked too much on one trade. Suppose you worry about losing money, and you become hesitant to get into the market. Lower your risk. Wait until you learn how to manage your emotions.
Decide on your risk to reward ratio and only take trades that align with it. For instance, a 1:4 risk to reward ratio will, over time, build your account and allow for losses on the way. Try to establish a ratio of at least 1:2.
What Type Of Trader Are You?
Do you prefer the rush of scalping where you are in and out of the market quickly? Or you may choose swing trading where you hold positions for days or weeks to milk maximum profits from the market? Or you could be a day trader where you open and close a few trades during the trading day.
At first, you won’t know what type of trader you are. But it won't take long for you to work out what suits your personality and style.
What Are Your Strategies?
Have you got one or two clear Forex strategies set up? (We cover the top five Forex strategies here). With a set plan, you know what you are looking for, so you know when to enter and exit the market. You also know when NOT to enter the market, which is probably the most crucial factor.
Are You Keeping Records?
Keeping a trading journal is a brilliant way to measure your progress. Document all of your trades. Write down the reasons for taking a trade, what went right or wrong and whether you followed your plan. You can even write down how you felt about the trade, what your emotional state was and how you overcame it.
We’ll close this guide part with a famous Benjamin Franklin quote, “If you fail to plan, you are planning to fail.”
Key Points From This Guide Part
- All successful Forex traders have a trading plan.
- A trading plan will be unique to you.
- Always have a stop loss in place.
- Plan to minimise risk for every trade.
- Aim for an excellent risk to reward ratio.
- Your trading plan will depend on how much time you have available.
- Your plan must align with your personality, including strengths and weaknesses.
- The ultimate goal is to become a little better than the day before.