Why You Need a Forex Trading Plan And How to Set it Up
If you begin trading in Forex without a lot of prior preparation, chances are you won’t succeed. Many people are unsuccessful even with previous experience, and without adequate preparation you are at a huge disadvantage.
For this reason, even experts need a Forex trading plan, in order to ensure that their trade is an investment, rather than a gamble.
What is a Forex trading plan?
A Forex trading plan is simply an outline of your planned trading activities. It contains the set of rules that you have determined for your strategy and how you are going to implement them. Once fully outlined, trade activity is easy to execute, and you are better equipped ot analyse the market and apply your analysis.
How to make a Forex trading plan
Developing the initial outlines of a plan is rather simple. First, it is imperative to determine the frequency of your trading. If you have been trading for a while, this involves observing your accounts history, calculating how many trades you opened per day or per week, and how long you kept them open for.
With this information you can decide how to plot your plan. If you're a day trader, you'll want to plot each day. If your plans are closed after a few days in general, you are better off plotting on a per week basis. You then decide the dimension of your plan.
When you develop your plan, you're effectively setting a cap on your amount of opportunities. This is not necessarily a bad thing, as more opportunity means more chance of losing as well as winning. It is only in cutting opportunities out that you can effectively make the most of those likely to earn you money.
A Forex trading plan helps you cut out emotional trading, as impulsive trades have no place in a rational plan. This can end up saving you a lot of money, effectively keeping you in the game.
Setting up the plan
The following decisions must be outlined in your plan:
It’s always tempting to buy on intuition, but it’s almost never a good idea. Optimism bias leads us to believe that something big is about to happen, but without an intellectual basis to make entry decisions, you're unlikely to hit the jackpot. Determining what qualifies as an entry signal is key in setting up an effective plan. These signals should be as descriptive as possible, so that they are easy to adhere to.
It’s even easier to fall into the trap of impulsivity when it comes to exiting a trade. You may be anxious to cash in earnings, or tend to wait too long. Conversely, you may want to wait it out to see if you make back losses, or immediately exit. Descriptive exit signals are vital for effective trading.
Stop Loss (SL) and Take Profit (TP)
In addition to your entry and exit signals, it’s vitally important to have SLs and TPs in place. SLs are more important, and every trade should have an SL attached. It is recommended that you set TPs before committing to a trade.