How to Develop A Winning Trading Plan in Forex Market

As a forex trader, the name of the game is to be successful and earn profits on your trades. A winning Forex trading plan should be the starting point for any journey to becoming a consistently profitable Forex trader. With a smart plan, you’ll have guidance on which market to trade, when to take profits, when to cut your losses, and where other opportunities could exist. In this article, we will go through the basics of a forex trading plan, the advantages with one and show you how to build a winning trading plan.

What Is A Trading Plan

A Forex trading plan is the blueprint of everything you do as a trader summed up in the most concise, yet descriptive, way possible. It sets the conditions under which a trader enters trades, identifies markets, exits trades and manages risks along the way, helping you decide what, when and how much to trade.

Your trading plan should consist of when and how you trade as well as what you do before and after a trade. A trading plan should be your own, personal plan – you could use someone else’s plan as an outline but remember that someone else’s attitude towards risk and available capital could be vastly different to yours.

Furthermore, a forex trading plan needs to be revised as your trading skills improve. Please do not make the mistakes of thinking that your trading plan is set in stone and you simply have to make it work.

The Importance of Having A Forex Trading Plan

The benefits of a trading plan include:

1. Better trading discipline

A Forex trading plan helps to keep you disciplined. Trading is a business and needs to be treated as such. Just as a business has standard operating procedure to keep things running smoothly, you have a trading plan to stay disciplined.

2. Manage your time more efficiently

A trading plan helps you to manage and spend your time profitably. You spend less time analyzing charts. Because this becomes a routine in your trading, it gives you less stress to trade and you can schedule your time very well and feel at ease. Since you already know what to do and how to do it, all you do is to trade only what the plan says.

3. Avoid the pitfalls of an emotional trade

As a successful forex trader, it is important that your trades are based on logical decisions rather than emotional ones. A successful trading plan will help you avoid the pitfalls of an emotional trade and ensure that your trades follow your preset parameters for forex trading.

4. More room for improvement

It is only when you have a trading plan that you can take clear records and journals fro your trading. Defining your record-keeping procedure enables you to learn from past trading mistakes and improve your judgement.

Steps to Create A Trading Plan

There are four easy steps to follow when creating a successful trading plan:

1. Know yourself

Assess your your market knowledge

The details of your trading plan will be affected by the market you want to trade. This is because a forex trading plan, for example, will be different to a stock trading plan.

Assess Your Risk Tolerance

Assessing your risk tolerance is an important step in building a trading plan because it will impact your trading strategy, risk management, and other aspects of your trading.

In this step traders will need to discover their personal risk tolerance which corresponds with how far a trader is willing to set stop losses when limiting downside risk.

Decide what type of trader are you going to become

There are four kinds of traders in forex markets: the scalper, the day trader, the swing trader and the position trader. The scalper often keeps trades open for a very short period of time and trades the market in times of very high volatility. The day trader closes all positions at the end of every day. The swing trader will keep trades open for days at a time and the position trader  holds positions open the longest of all traders.

By defining factors such as when you like to trade and what indicators you like to trade on, you can know what type of trader you are and match with the appropriate strategy.

2. Choose your forex strategy

Choose Your Analytical Approach

The analytical approach helps traders to narrow their focus on a handful of scenarios that the trader is comfortable with. Thereafter, traders can look for opportunities to trade based on preferred trade set ups.

Set Exit Rules

Before you enter a trade, you should know your exits. There are at least two possible exits for every trade. First, what is your stop loss if the trade goes against you? Second, each trade should have a profit target. Once you get there, sell a portion of your position and you can move your stop loss on the rest of your position to the breakeven point if you wish.

Risk Management

Risk management is the cornerstone of a successful trading plan.  While risk management has a lot to do with the strategy you trade with, it also has to do correctly assessing position size, and risk to reward ratio. In order to manage the risk of your trades, you should plan your risk exposure, manage your stop losses and diversify your trades.

3. Implement Your Trading Plan and Keep a Trading Journal

If you’ve gotten to this part, you’re ready to execute your trading plan on the live market. For a trading plan to work it needs to be backed up by a trading diary. You should use your trading diary to document your trades as this can help you find out what’s working and what isn’t.

4. Analytics & Review

Every successful trader reviews their trading for the day. Just like an athlete reviews film from their past games to see what they could improve upon, you have to have a process for reviewing your trades each day/week/month.

Conclusion

Having a plan to be successful in any field of endeavor is highly recommended, but trading the forex or any other financial market without a plan is almost a sure recipe for failure. Traders should implement a trading plan in order to establish a clear framework when navigating financial markets. This plan is tailor-made for your trading goals and styles, and as such is an indispensable tool for the forex trader. In addition to a successful trading plan, having a trading checklist ensures that you follow the rules and strategies in your trading plan whenever you trade.