Sep 04, 2008
Tips for Making Forex Trading Plan
by Bi3ard / General
Like in any other business, having a good plan in Forex trading is a key to success. A good trader will always prepare for what the market has to offer before it opens.
Before going straight into subject, I would first love to explain what a Trading Plan is.
What is Trading Plan?
A trading plan is a guide that a trader uses to concentrate on consistently making high probability trades. Essential thing is that a trading plan is custom built. A trading plan also should not be confused with a trading system, because trading system is just a part of a trading plan. However every trading plan can include some money management systems.
A good trading plan should consist of trading strategies you have tested and that give high probability trading opportunities. Those trading strategies will generate buy and sell signals. The second part of a good trading plan is the money management aspect which will help you in trade exits, position sizing, and general risk levels.
When we learned basic things about what good trading plan should be, let’s find out how to make a good Forex trading plan.
Making Forex Trading Plan
There is no shortcut in creating a trading plan. It has to be written down and will probably be the most time consuming effort that a forex trader will have to deal with. Remember that writing down the plan is the most important step if one forex trader has intention to be consistent in the trading. Also, constant reviews of the trading plan are also essential in order to improve in your trading.
It’s important to write down all pros and cons, estimate possible obstacles, including worst scenarios.
Some of the important questions you should include in the making of your trading plan are:
- What type of system will you use? – Ensure you have tested this.
- What pairs will you trade? – Since most pairs are complementary in forex, it makes no sense to trade like trending pairs. For example, trade both the euro and the pound only increases risk but do little in increasing reward.
- How much will you risk? - Forex lot calculator can be useful guide in this.
- How much can you lose? - You must be ready to take some loses in your trade.
- How much do you expect to make per trade or per certain period of time (week, month)? - Based on your account size, system risk reward and lot size you should be able to determine reasonable trading expectations.
- The possibility of unexpected variables – Not likely, but what if you get a sudden 300 pip move? How can you stop? How will you prevent yourself from losing all the money?
- What is your holding time? - How long you gave your trading system to work before you knew it might not be an optimum trade? It’s a problem with a lot of traders, which are in the habit of not knowing how long their system is likely to be accurate. Your exit strategies must contain holding time.
- How many trades will you make per pair or per certain period of time (day, week)? - Remember that the more trades you make the higher your cost and higher your risk. It is very important to know when to quit in a day. If you had 3 trades and none have gone anywhere, it is a good idea to come back the next day.
Of course, all of these mentioned depends on your own custom built trading plan.
A trading plan is the most important gift a trader can give himself. It’s also the most important task for every trader.
By having a good and accurate plan that generates ideas, you will have good reason to be in a trade and you will reduce the risk of making emotional trades that are not based on high probability trade setups.
So, do you have pencil and paper? Then sit and write it down.
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