There is a fine line between success and failure when it comes to forex trading and a forex trading plan is something that can tilt the scales in favour of one or the other.
Considering the fact that every decision you make when you trade in the forex market translate to either success or failure, you want to be able to implement a method or a formula that is engineered to minimise the risk of loss and help you become successful in your own accomplishments and the goals you have set.
A forex trading plan is what many traders appreciate as a helping hand and a trusty guide in their trading activities. In fact, many will predict your failure as a trader just because you don’t stick to your own personal and tailored forex trading plan.
What is a forex trading plan?
There is not that much of a difference between a forex trading plan and any other plan you would imagine in different aspects of life and business.
A forex trading plan simply outlines and organises your planned activities when forex trading.
Many traders think of their forex trading plans as to-do lists by the way they include activities step-by-step, follow a pattern, and are personalised.
In contrast with a simple to-do list you will use for shopping or in your day job, a forex trading plan normally helps for developing a set of rules a forex trader can and will implement in their forex trading practice.
The set of rules defines your trading behaviour at any given moment and situation by considering your financial goals, money and risk management methods, opening and closing position criteria.
Such a set of rules or a step-by-step guide of trading activities helps a lot for following a clear plan of action and for better analysing the forex market in general.
A forex trading plan allows for a reflection and analysing the success and failure, then applying the analysis to future forex trading strategy and actions.
A forex trading plan is particularly useful for traders who do not have enough practice in controlling their emotions and excluding fear and greed out of the equation.
Such a plan can guide the trader’s actions in a more rational way and prevent impulsive decisions that can lead to failure.
Forex traders who follow their forex trading plans usually do not make rookie and silly mistakes and when they experience failure they can evaluate the loss and have a chance to prevent it from happening again.
You might also like: 6 Trading Mistakes that Will Cost You Money and How to Avoid Them
Why do you need a forex trading plan?
The answer to this question is pretty obvious. Just imagine building a house without an architectural blueprint or cooking without a recipe.
You don’t go out buying bricks and furniture before laying the correct foundations and not knowing how much money you will need for the whole project.
You also don’t boil the water in your pan with no ingredients in your fridge.
Going into forex trading blindly is not proven as an effective and successful practice, this is why even experienced traders stick to their forex trading plans.
You can treat forex trading as a business, which means that you should have a good organisation and structure before developing it and helping it grow.
A forex trading plan is a structure to your trading activities that helps you not to lose your grip and stick to your objectives even in the fast-changing and dynamic market forex is.
With your forex trading plan in mind, you are able to trade objectively, stay away from hurried decisions, have more confidence, and cut back the impact of emotions.
Here is a summary of the benefits of having a forex trading plan:
- It makes trading simpler
- It reduces stress
- It estimates your performance, identify issues
- It helps you prevent psychological issues
- It can reduce the number of bad trades
- It helps you prevent irrational behaviour and assists you in trading objectively
- It enables you to have control
- It helps you be disciplined
- It helps you trade outside your comfort zone with confidence
- It guides and navigates your way
- It allows you to detect problems quickly and correct them
Why is a forex trading plan personal?
One of the most important things you will learn as a forex trading beginner is that you are the one and only ruler of your destiny and the decisions you make when trading.
Of course, you will look up to people with more experience and who are successful, you will look for inspiration and motivation but you never want to follow someone else’s advice blindly.
Because you are your own trader and you have your own individual trading style, strategy, goals.
Just because someone makes a profit following their own method does not mean that the same will work for you too.
We are all different people in different situations and all this has its influence on the way we trade and experience a loss or a profit.
All forex traders have a different economic outlook, different forex views and perceptions, different thought process, risk tolerance, experience.
This is why your forex trading plan should be personalised and tailored to your own style of trading and the skills you have, your characteristics and traits as a trader and as a person.
It does not mean that your plan will stay the same throughout the years, you can always update and change it around as you learn from the market and grow as a trader.
However, you should always make sure to stick to your own forex trading plan as developing one and following it means that you develop and improve your forex trading discipline, one of the most important and essential skills for every trader.
In case you want to be a successful trader and we are sure you do, your trading discipline should be rock solid.
See also: 10 Free Forex Trading Tools You Can Use Right Now
Key points to include in your forex trading plan
On an initial stage, you can easily develop a forex trading plan.
A good forex trading education can help you a lot in terms of providing you with knowledge and information on what to include in your plan and how to develop it so it is efficient enough.
This is why we at Trading Education recommend you investing your time first of all in a free trading course you can benefit from a lot if you want to learn how to trade.
You can read more about a free forex trading course here. You can get our comprehensive forex trading course for absolutely free. It is equally useful for both beginners and traders with experience so take full advantage of this.
The initial steps of developing your forex trading plan include determining the frequency of trading which means that you will observe in-depth your trading account, approximately how many trades you place a day, a week, what is the average duration of your trades, the overall time dimension that illustrates your forex trading activities.
Traders who trade short positions usually build a plan plotted over 24 hours, while long positions are better illustrated by a plan including a week-long observation.
Once you determine the trading positions you prefer you finally know whether a day or a week as a dimension is more effective for your forex trading plan.
Next step is applying the limitations to the trading plan which includes taking a number of the winning trades (per day or per week) and multiplying it by 1.2.
The limitations of your trading plan help you understand the optimal number of trades recommended per day/per week.
Of course, limitations mean fewer opportunities for a profit but also fewer opportunities for loss and a more controlled and disciplined forex trading approach.
The more limited your trades per day/per week are, the more you will be able to focus on each trade in details and don’t do things impulsively and in rush.
Considering the fact that many forex traders encounter emotional trading to some extent and in some stage of their overall experience, the limitations of your forex trading plan will also help for rationalising your trades more and decreasing the volume of compensate trades done additionally after a non-successful trade.
Don't miss: Forex Trading for Beginners in the UK
Besides the importance of the time dimension of your forex trading plan, here are some other important components you can include and take advantage of:
- Entry Signals – It is something that happens to every forex trader at one point or another, especially to beginners – you jump impulsively on an opportunity because your gut feelings tell you that something good will happen. Later on, you find yourself with an open position and you don’t know what to do next. Do you close it? Do you expect a profit? What profit to expect? This is when a good forex trading plan comes into action as it includes a clear description of the entry signals you have already planned to use when implementing your trading strategy. So make sure to consider the entry signals, note them down, and strictly follow them.
- Exit Signals – What applies for the entry signals applies for the exit signals too as every forex trader should have a clear understanding of their exit signals and adhere them in their strategy. Closing a trade at the right time and on the right instrument is as essential as when you open one as it means that you decrease the risk of losing a decent trade or winning too early and not be able to benefit from the full profit.
- Stop-loss and Take-profit – Every trader knows that every trade in forex should have a stop-loss (SL) and take-profit (TP) attached to it. This is one more aspect to add to your forex trading plan, however, keep in mind that in this case, SL levels are more important than TP levels. When it comes to setting up a stop-loss you don’t want to make exceptions as it is a vital aspect of every trade. Additionally, your forex trading plan should include not only the SL but also its level. TP levels, on another hand, may not be that important but if you want to develop and follow a detailed and very efficient forex trading plan, make sure to include to set take-profit levels too before you commit to a trade.
- Goals – As a forex trader you should be able to clearly define your goals and let them motivate you. You should always be realistic about your goals and look at them to the prism of many factors such as your capital, your risk tolerance, how much you are ready to invest, etc. It is not realistic to expect forex trading to become your main job with an initial investment of a couple of hundreds. Writing down your realistic goals helps you trade objectively and achieve your milestones, reach your targets and respect your risk and money management rules.
Why should you stick to your forex trading plan?
There is a saying that goes “If you fail to plan, you have already planned to fail” and there is no better way to describe the importance of a forex trading plan and actually sticking to it.
The majority of the successful forex traders will tell you that a big reason for their success is planning.
A forex trading plan is like your personal ID in the forex realm, it illustrates and defines your trader personality, your expectations, aims, goals, risk management rules, discipline and patience, trading systems.
The plan helps you understand and actually control what may happen, why, when, and how at any given moment.
Following such a guide means that you can limit forex trading mistakes and minimise the potential losses, avoid rookie decisions in the heat of the moment, preventing dramatic failure.
Since it is easy to be consumed by overwhelming emotions and the idea of making a significant profit, a forex trading plan is the voice of rationality in your head.
The best way to prevent turbulence in your trading is by minimising the process of thinking and feeling every time you make a trade and instead of sticking to a forex trading plan you know is efficient and works for you.
With a good trading plan, every action is foretold and there is no room for impulsive and rushed decisions.
People also read: The Importance of a Forex Calendar
Checklist for writing a forex trading plan
This is a checklist of the key components you want to include in your forex trading plan and make sure to stay on track.
A checklist is always a great idea to remind you what, when, and why you are trading, it helps you follow the path you have paved for yourself in the forex world, and it usually includes:
- Your goal
- The analysis tools you use
- The amount of money you trade
- The amount of money you are willing the risk (it depends on your own risk tolerance, however, professionals recommend to not exceed 2% of the total amount of money you put into a trade)
- The risk to reward ratio linked to the particular trade
- Types of orders for different types of trades
- High probability trades
Here are a few final things to consider when writing your forex trading plan:
- What timeframes and what instrument you are trading
- How to be consistent with your methods
- Have a focus on how much money you will eventually lose, not how much you will eventually earn
- Before getting into a trade you should already know when you are getting out
- Always use stop-losses
- When making a reflection never ask yourself: “What if?” What is done is already done, think of how to improve your methods if needed
No matter where your place is on the spectrum of forex trading proficiency, whether you are a forex trading newbie or an advanced and seasoned trader with an enviable experience, you should always understand and appreciate the importance of an effective forex trading plan.
As many sources stress the significance of such a helping hand in your forex trading endeavours, it is easy to understand why it is so essential to be able to plan ahead, stick to your plan, know what you are looking for, what are your aims, how to plan so you can achieve your goals.
Diving straightforward into the forex realm without a good forex trading plan means that you are most probably not prepared enough and the chances of you succeeding are lower.
The forex market does not show preference to anyone, it can have no mercy to anyone and everyone is at risk. It is all up to you to decide your destiny and a forex trading plan can make a lot of a difference.
Do you want to learn more about forex trading?
Make sure to check out these articles...
And you can find some educational tools to test your knowledge here - forex trading quizzes, and forex trading videos.
If you have enjoyed reading this article make sure to like and share it so others can appreciate it too!
Leave a comment underneath on anything trading plan related, we’d be happy to hear from you.