The ultimate guide to building a forex trading plan

Forex trading relies on the amount of knowledge a trader has, this includes qualitative research, another factor is a trading plan that acts as a guide for the entire trading process.

A trading plan is a fundamental requirement if you want to start trading any financial instrument and has various benefits for traders at all levels, new or experienced.

What is a trading plan?

A trading plan is a layout or an outline that forex traders follow for research and trading in any financial market. Trading plans aim at managing trading resources, and other factors required to achieve trading objectives.

It works like a business plan and helps forex traders follow certain activities to reach their trading goals. For some forex traders, their trading plan offers a step by step guide they regularly follow when they want to open a trading position.

Why should you have a trading plan?

A trading plan is like a trading tool that allows you to develop a trading schedule and keep track of your trading activities. When you start trading forex, you have some expectations that you want to achieve after a period.

These expectations are like the objectives, and a trading plan helps you define them clearly. Successful traders have trading plans guiding them when financial markets have distractions, especially when security is doing well and many investors rush to invest.

A reliable trading plan offers consistent results. The forex trader has to ensure they do a deep analysis and research on different methods they can add to their trading plan. It can take from a period of one week to a month to develop a trading plan.

It helps a forex trader to avoid rushing to every trade that looks lucrative. It also enables the trader to stay focused on their trading goals and stay within the scope of guidelines they have selected according to their trading goals.

How can I develop a trading plan?

To develop a trading plan, you need to evaluate your trading activities and account balance after each trade. It will help you to understand what you need to do when trading and how you can regulate your trading to minimise losses.

Some factors you to consider include:

• The trading frequency in a day or a week
• The amount traded in a period
• Time frames
• The trading strategy
• Trading tools
• The number of trades that closed in losses
• The number of open positions that closed in profits
• The analysis process

These factors will help you understand what you need to add or fix when trading. The trading plan needs you to research what other successful traders are doing to profit and apply the strategy. Since it is an outline, it requires that you form a habit of trading within the scopes of the trading plan.

What should be in a forex trading plan?

Trading objectives

These are the goals you want to achieve when trading after a specific period. People do business or venture into an activity with expectations to gain something. It should be the same case with forex trading.

The forex industry has risk exposure, if you are trading forex, you understand why you are risking your capital. If you are a new trader and hoping to become a full-time trader, you need trading objectives that help you reach your goals.

Forex trading is also a way of getting extra income for some forex traders, while others want to become professional traders. Whatever reasons for investing in forex trading, you have to outline them clearly so they can guide you as you continue trading.

Analysis tools

The analysis tools vary with the financial market you are trading. Some securities would need the forex trader to invest in technical analysis more than fundamental analysis. It means you have to analyse the type of asset you are trading.

Identify the technical and fundamental tools you applied before that worked with your trading plans and increased your trading success. These are the tools you would want to include in your trading plan when conducting any analysis.

Increase the trading tools you use by learning more about trading some financial markets. Various trading methods improve the chances of success, some of them are through exploring different trading tools other successful traders are using.

Some crucial tools when trading financial markets are graphical, research and drawing tools. There are also technical indicators and candlestick patterns for technical analysis. Forex traders can use the economic calendar, news analysis and daily financial releases for fundamental analysis.

The amount you are willing to trade

It is one of the crucial factors to consider in a trading plan. Most traders ignore this part, but it is one part that makes a huge difference between successful traders and other traders. Forex traders have to decide how much they are willing to trade in a day out of the total account balance.

Setting apart how much you are willing to risk helps you have discipline; it also allows you to manage your capital without wasting it. Some forex traders set apart a percentage of the account balance when trading.

It becomes easy for forex traders to monitor how they use their finances and know how much they have made or lost in a trade. For day traders, they can look at their transactions at the end of the day to find out if they have profited or lost.

An example of the amount you are willing to risk is the trading rule which you can only risk 1% of your trade. Many forex traders comply with this trading rule which helps prevent them from risking too much in a losing trade.

Number of open positions in a period

It is also part of the trading plan after you have set apart the amount you are willing to risk in a day or within a period depending on your trading strategy. It is imperative to limit the number of open positions in a period.

Forex traders limit open positions by multiplying the number of profitable trades within a trading period like a day by 1.2. It gives you fewer traders than what you originally had and limits the potential profits, but at the same time, it reduces the risk exposure.

The fewer the open trades you have, also allows you to focus on making the most from each open Position increasing the chances of profiting. It also increases the time spent on analysing financial markets.

Timing of the trade and the time frames to use

It involves the amount of time you spend in analysis and an open position. To know how much time is enough, look at the previous trades and estimate the amount of time analysing the market. It is better to spend enough time evaluating the market to make it easy to know the steps to take.

Trading platforms offer graphical tools such as the charting software that allows traders to look at security in the market at different time frames. The time frames get classified into two short term and long term time frames.

Forex traders can navigate from one-time frame to another in real-time when trading. Novice traders tend to stick to one or two timeframes, but moving through multiple timeframes is beneficial as you can access the primary trend using the larger time frames.

When developing a trading plan, You include a time frame that works with your trading strategy. Day traders use shorter time frames like the 4 hours and the daily charts, while trend traders use the monthly or yearly charts.

It is imperative to notice that the shorter time frames are more susceptible to false signals than longer timeframes. Ensure to switch between timeframes to have a complete picture of the trend direction.

The type of order

There are two types of orders in the financial markets, limit and market order. A trading plan has to have the type of trading order you prefer to use with different securities. This information should be from research; the entire trading plan should improve your chances of success.

When to use a market or limit order depends on the liquidity and volatility of the market. It also depends on the trader, some traders prefer to limit orders, while some profit from market orders.

Leverage rates

Forex trading attracts many traders because some forex brokers offer leverage rates of up to 1:2000. The currency market has some of the highest leverage rates in the trading industry. Some countries try to limit the leverage to 1:50, while in some countries, it is unregulated.

Despite what your forex broker is willing to offer as the highest forex leverage rate, a trading plan has to have some limits to the highest you can use. It reduces the chances of wiping out your account balance if you lose a trade with high leverage.

High leverage has a high risk, and that is why a forex trader ensures they apply the risk management tools in place when they trade using high forex leverage.

Entry strategy

It is part of the trading strategy applied when trading. It is one of the factors that should be in a forex trading plan. It involves having the right Research tools that will help you filter relevant trading signals from many of them that you get when you want to enter a market.

Most forex traders use candlesticks such as pin bars and engulfing patterns, trend lines and support and resistance lines. You have to know how to approach different securities when you want to enter a financial market.

Some entry strategies include breakouts or pullbacks, confirmed by momentum and trend indicators. You should also enter the market if you have seen the primary trend to make insightful decisions based on market signals.

Before you enter the market, you require a comprehensive analysis that has scanned the market such that you don’t get stuck after opening a trading position. The analysis evaluates the direction of the price action, including how much you expect to make on a trade.

Exit strategy

A trading plan also consists of an exit strategy when the stop-loss or the take profit is not triggered. An exit strategy is one of the key processes of the entire trading process because it dictates if you will lose or profit.

If you delay in the market, you can risk losing the profit you have already made. If you exit prematurely, you can miss making more. Forex traders have to be prudent when choosing an exit strategy. A good exit strategy should have a balance to be effective in varying markets.

An exit strategy gets derived from signals you get from the market, which means you have to understand the price action of the market you are trading. Exit signals can be from candlesticks, technical indicators or both. An existing strategy should ensure that you make the most profit from the trade and minimise losses.

Risk management

It is one factor that any trader must follow in the securities market. Each market has risk, whether you are trading derivatives or an underlying market. Some have more risk, especially when leverage/ margin gets applied.

Most forex brokers offer a wide variety of risk management tools for trading. The most popularly used are the stop-loss and the take-profit. The stop loss allows the trade to exit the market to leave the market at a specific price when the market moves against the forex trader’s prediction.

The take-profit is the opposite of stop-loss and allows you to exit the market at an ideal point when the market goes as the trader predicted. Risk management is imperative when you are trading in a volatile market.

Forex traders should incorporate it into a trading strategy, as it is part of the trading plan. Other risk management tools like the guaranteed stop loss and stop-limit order.

Trading limits

It shows when it is safe to trade and when the risk is too high. Trading limits are also part of the trading plan as they act as rules the trader has to follow when trading. The limits should be specific such that when the conditions of the securities market are not good for trading, you cannot open a position.

For example, if the market prices of an asset are volatile, if the volatility is too high, you cannot open a position. You can also set limits when the market has low liquidity or before a major announcement that could lead to uncertain market reactions.

Set a trading limit to stop trading when you lose two or three trades. It helps you step back and evaluate the market instead of compensating for the loss with another trade. You can set trading rules that allow you to limit the size of a position when the market is volatile to prevent risking your capital.

Why should you follow a trading plan?

To be successful in anything, you need to have a plan, which is the same concept as trading forex. The trading plan helps you focus on the more critical aspects of trading and ignore other distractions. Forex traders have different methods they apply for that work in the same trading conditions.

A trading plan allows a forex trader to identify a trading style that offers them consistent results. It also helps them identify their trading objectives and stay in control even if the market moves against the trade.

Forex trading is as tedious as it is emotionally draining. You cannot expect to profit in every trade you make. It is easy to get overwhelmed when you profit or lose a trade. The trading plan ensures that you do not base your decisions on the outcomes of previous trades.

Benefits of a trading plan

It makes trading simple

Trading is easier when you have an outline of what you need to follow if you want to trade. You have a step by step guide on how you should open or close a trading position. It allows the trader to have a trading routine when they want to trade, preventing wasting time and planning every day.

Discipline

The best advantage of having a trading guide is to develop trading discipline. It helps you limit overtrading, wasting time in one process and learning to manage your emotions. It enables forex traders to trade based on market signals rather than their feelings.

Identifies problems and fixes them

A trading plan allows the trader to analyse their trading choices and find places they are making mistakes. When you identify the mistakes, you can research and find solutions preventing you from losing more capital.

It reduces bad trades

Having a trading plan helps you learn how to manage the number of trades and the position sizes. In the process, you can concentrate on capitalizing on the few open positions and increase the chances of profiting.

Having a trading plan can help you trade other securities with confidence because you can follow your guidelines and see whether they work with other securities. If you have successfully used a trading plan with smaller positions, you can increase the position size.

It reduces the risks

By reducing the trading sizes and the number of positions, you can open in a day or a week, you reduce the risk. A trading plan enables you to lower the number of trades you would regularly use to compensate for the loss. It reduces the risk of losing your capital.

It helps you to achieve your trading objectives

When you create a trading plan, the goal is to achieve your trading objectives. It is why it is crucial to follow a trading plan. It ensures within a year or two, you accomplish some of the goals.

It guides you during trading

A trading plan contains a trading procedure of how to trade a security. It helps you to know what to do after opening a position, how you can exit a trade and the technical tools to apply. If you have a trading plan, you hardly get stuck in any process in a trade.

It reduces stress and psychological pressure when trading

Forex trading can become stressful, more so when the market is volatile. There are periods when you make more losses than profits which affects many forex traders and lead to overcompensating for the losses. A trading plan allows you to stop trading if you experience losses or limit the open positions.

Conclusion

Forex trading is a process that requires dedication to learn and practice. A forex trader can succeed or lose based on how much they are willing to commit. A trading plan is an essential trading tool in this process.

It offers a blueprint for forex traders to follow when trading any security, ensuring they can trade with confidence. It also allows the trader to plan and prepare for any problems they might find.

The financial markets change with time, especially with the new technology and new securities emerging. These changes should not cause forex trader to abandon their trading plans because a good trading plan follows the principles of forex trading.

For the trading plan to be successful, the trader has to make sure they take some time to create the trading plan. Although it is possible to develop it one in a week, a credible and reliable trading plan is one that the forex broker continues to modify after a year.

Frequently Asked Questions