Trading is a new age methodology and means to generate income which most of the investors prefer to undertake. While many investors undertake this path but it is important to understand that one must not fail to plan because the absence of a trading plan may trigger a plan to fail.
One of the major differences between having a trading plan and not having a trading plan is either you are making money or losing it. Having a trading plan is very important as it gives an organized approach to execute forex trading. The following article is a complete guide that will help every investor to create a sound forex trading plan.
What are the benefits of Forex Trading plan?
Forex market is a very unpredictable market so having an organized approach by way of proper forex trading plan will help in maximizing the profits from investments and also help in mitigating the risks associated with the forex markets. Following are the benefits of having a forex trading plan:
- Trading becomes easy and simple when you have a proper plan as compared to not having one
- A trading plan helps to keep stress levels at bay
- A forex trading plan gives you the ability to gauge the performance of your investments, understand problem areas and helps you in taking rectified actions.
- A comprehensive forex trading plan helps you to avoid psychological confusions as it helps in making wise and informed decisions.
- A plan gives an organized approach to carry out forex trading thereby reducing the count of bad trades
- A trading plan channelizes your energy and helps you in avoiding bad decisions in times of market downturn
- A forex trading plan helps in inculcating a disciplined investment routine in your trading adventures as the only difference that differentiates trading from gambling is the presence of a full-proof forex trading plan
- A forex trading plan is your “Google Map” that will help you in navigating to your financial goal and devoid you from taking wrong turns
Thus, above are the most important benefits of having a forex trading plan. Kindly note, having a forex trading plan is a work in progress as the forex market environment is ever changing and dynamic so you always will have to re-work on your trading plan as per the changes in the market. So it is best to re-assess your trading plan periodically to be in sync with the current forex market conditions.
What are the key components of a Forex Trading plan?
Benefits of having a trading plan amply describe the importance of having a forex trading plan but not many of the investors know what are the key ingredients or focus points while creating a forex trading plan. Don’t worry as we are here to enlighten you in understanding the key components of a forex trading plan:
- Defining financial goals
- Developing a trading plan structure
- Carrying out Research and educating oneself regarding the forex market, its environment and ways of trading
- Analyzing the market situation and Creating a strategy with the help of various technical tools
- Creating a backup plan for mitigating the risk associated with forex trading
- Understanding the importance of ‘timing’ in forex trading i.e. you must know WHENs and HOWs of buying, holding and selling of assets
- Testing and re-testing the forex trading plan
- Documenting the cause and effect of every action and decision to create a database that will help in taking a wise financial decision in the future.
The above key components must be used to create a forex trading plan. Using the above components the first and foremost thing that every investor must do is to write down the plan. Let us understand how to build a forex trading plan.
Set a financial goal
The first and biggest step for building a forex trading plan is setting up financial goals. Having a pre-defined financial goal will help you in formulating a very comprehensive and focused forex trading plan which will help in achieving the targets in the stipulated time-frame. While setting a financial target you must also set the time-frame for achieving the same as both these factors will help in building a successful forex trading plan.
Write down forex trading plan
The biggest step in a forex trading plan is creating an actual written plan for the forex trade. Many traders have a trading plan in mind but putting it on paper and having a record of it is the most essential element of forex trading. Putting a trading plan in writing will help in being disciplined and avoid indecisive actions.
Define the instruments to be used
Once you have set your financial goals and have written down your forex trading plan then the next important step is to pen-down the pair of currencies that you wish to trade in the forex market. The best step is to write down pairs of currencies, test your trading strategy on them and then record the results.
Another important aspect is to trade one pair of currency at one time because not all of your trading strategies work well on all the currency pairs. So start with one pair, test your strategy and then record the result.
This process will help you understand which currency pairs are safe for you to trade with your trading strategy and which currency pairs you should avoid.
Define the indicators to be used
While doing forex trading traders usually use various indicators to gauge the market and currency movement. So be sure to record the results of indicators that are used while doing forex trading as you will know which indicator is working best with a particular currency pair and which isn’t.
Define a ragtime for your trading plan
Forex market has a stipulated working time but the forex trading environment is very dynamic as it changes every minute. To cope with such dynamic and unpredictable market condition it is best to test the trading result of your forex instrument across a various timeframe. Testing the behavior of your instrument at different times is very important as you are investing your hard-earned money.
So avoid trusting your money to hearsay rather test every time period and do not forget to record the results. Recording results will help to create a database of behavioral statistics of your forex instrument.
Set ENTRY point
One of the biggest roadblocks while doing forex trading is to know when to enter the forex trade. Setting up an ENTRY point for forex trading is very complex as the market is very dynamic but the following are few pointers that will help you in establishing an entry point for your trade:
- Understanding and recording the exact market conditions
- External conditions like world economic conditions, news, events, etc
- Time of the day when you should or shouldn’t enter a trade
- Understanding whether to hold long or short your forex instrument
The above pointer shall help in mapping out an ENTRY point for your trade and help in boosting your forex trading plan.
Set STOP LOSS point
One of the important aspects of forex trading is defining a point called ‘stop loss’ that helps you in limiting the loss in a trade when the underlying asset reaches a particular pre-defined price point. A stop-loss point is designed to safeguard the investor from the loss that might occur in forex trading so make sure you set STOP-LOSS point and use it in your forex trading plan.
Define ‘percentage risk per trade’
Defining and setting percentage risk per trade is a very crucial aspect of forex trade plan and risk management system. Risk is inevitable in forex trading but defining percentage risk per trade is a wise method to mitigate the possibility of huge losses in trading. The best way to set a percentage is by setting it at the lowest and then testing it to seek the best outcome to achieve your financial goals.
Set timeline to take away partial profit
Forex trading will include facing losses as well as profits. So when the market is moving your way then it becomes imperative to know whether to hold the amount through the entire trade or to take away partial profit. So it is always better to have a plan of action ready not only at the time of crises but even in times of profit.
Re-define any changes
forex trading plan is subject to continuous changes. Every trader must be always willing to re-define and incorporate changes in the existing forex trade plan. The possible changes that can be considered in the forex trade plan are: move stop loss point or to add a position or re-enter forex trading in case of stopped out.
Re-defining and testing the changes in these pointers shall turn out beneficial in your favor. So it is always better to re-define the changes, test them for results and record the outcomes for future reference.
Set EXIT signal
Exit signal defines what you want to take away from the entire trade. Understanding and setting an EXIT signal is very important as it will establish a clear understanding of when to end a forex trade. So every trader must clearly define their own specific EXIT signals rather than leaving it to ‘gut feeling’.
while building up your forex trading plan it is important to oversee the other important aspects ruling the forex market. These factors include world economic conditions, war, news, geopolitical factors, etc. as these factors affect the performance of the underlying assets. Writing down pre-trading routines of forex market should help you in understanding the market performance of the underlying asset.
Testing the trading plan
Now that you have successfully written your kick-ass forex trading plan it is best to test it out before going live. Testing the trading plan will help to understand the expected result and if there are areas of improvements then doing possible improvements in the forex trading plan to create a full-proof trading plan.
Reworking the trading plan if required
upon going live i.e. after using your test trading plan live in the forex market it might happen that the testing trade plan might not work well in real time trading. So at this point, you might think about reworking on your plan in order to make it suitable for the live forex trading market.
Tracking the results
The last and most crucial step in forex trading plan is to constantly track the outcomes of the forex trading. Maintain a journal to track the outcomes is beneficial to record the results. Constant tracking and documenting the changes, outcomes of a forex trading plan shall help you in improving your trading system and maximize your trading profits.
Before we wrap up, here is quick summary of how to create a sound forex trading plan. while creating a forex trading plan apart from above – listed pointers, there might be other additional points to consider, but above pointers are sufficient for you to get started.
The only important thing that you should not forget before doing live trading is to test and re-test your trading plan. Also, do not forget to record the outcomes of your trading plan as it will help you to create a database for future reference.
Remember, before creating the forex trading plan ask tough questions first like:
- Why do I want to do forex trading?
- What is my financial goal?
- What is my investment appetite?
- What is the minimum amount I need to invest to achieve my financial goal?
These tough questions will give clarity on your financial goals and help you in making a better version of a forex trading plan. Forex trading success depends on a good trading plan, continued research and good knowledge of the market as these weapons shall exponentially increase the chances of your success.