How to Develop a Trading Plan
If you’ve ever read an expert's thoughts on how to succeed in Forex trading, you’ll see them making mention of plans and strategies.
Although there are many Forex trading plan examples, not all of them are generic. You often need something personal for them to work. This FXOpen guide will allow a trader of any level to create their individual trading plans.
What Is a Trading Plan?
There has been a long-running misconception about trading strategies and plans. The former only involves entry and exit rules, while the latter covers more than that. The plan comprises exit and entry strategies alongside the market in view, money management, and much more.
With this, it's safe to say that this is a guide to how you may approach your trades. Every plan, or successful trader strategy, is personal, so it should reflect your needs and requirements.
Why Do You Need a Trading Plan?
There are numerous reasons why a trader needs a trading plan. These include:
- A plan enforces discipline. It enables traders to continue in the currency market with the same zeal with which they began.
- It makes trades easier, and that’s because there’s a guide that you’re following.
- Improvements become easier when people follow a guide. A trader records all Forex market activities and can quickly identify where they’ve been going wrong.
How to Create a Trading Plan
The essential aspects of creating trading plans are all outlined below.
1. Identify Your Motivation
Maybe you plan to build a trading career? Or do you want to enter Forex just out of interest? Why do you want to trade? The answer will affect every step you take in the market.
2. Define Your Goals
Goals are just like your motivation, but they’re bite-sized. It's like breaking your motivation down into smaller, much more achievable pieces.
So, you can set a daily goal for your trading plan template, a monthly goal, and even a goal for a year. The goals are the path that you’ll follow to eventually achieve the final goal which was determined when you looked for motivation.
3. Assess Your Market Knowledge
An important aspect of a successful strategy is to conduct a skill assessment. Are you an expert who’s been tested in real-life situations, or did you learn from a guide? Either way, you need to know how good you are at actual currency trades before developing a trading scheme. Try a free demo account by FXOpen to evaluate your trading skills.
4. Choose a Risk-Reward Ratio
How much risk are you willing to take for trades? Are you ready to go into a trade even if the risk is four times the reward? What would be the perfect risk-to-reward ratio? These are all factors to consider when making a trading plan.
5. Keep a Diary
A good trader documents their day-to-day experiences. Regardless of whether it's a successful trade or a failed one, they note them all.
This helps others to identify the things that make their trades successful. It will also help you avoid unnecessary mistakes or bad decisions made in the past.
An example of a Forex trading strategy diary is shown below.
- The level at which the market opened and closed on that day.
- Entry and exit points for that trade.
- The amount you gained or lost.
- Comments denoting your feelings during each trade.
6. Establish Limits
One aspect that determines how to succeed in Forex trading is the limit that you’ve set. There may be daily profit limits for each day, and once you’ve reached that profit quota, the daily trades are done. You could also have a loss limit, and when you’ve crossed it, the market day would end.
Monthly quotas may also be established if there is a need for them. Similarly, when the monthly profit or loss quota is reached, trades could be closed.
7. Decide How Much Capital You Have for Trading
Before sinking into any scheme for your trades, it would be best to determine how much you’ve got for the Forex market. Would it be sufficient to obtain reasonable rewards in light of the risk? Would you need an extra job to have trading capital and is it worth it? Would it affect your daily needs?
An Example of a Trading Plan
Understanding how trade plans work is much easier when you’ve got an example.
- Outline Your Motivation: I want to become a successful trader.
- Define Your Goals: I want to make $100 profit in my first month, $150 in the second, and $350 within six months.
- Assess Your Market Knowledge: The only thing I know about the currency market is from the videos I have watched on YouTube.
- Choose a Risk-Reward Ratio: I will only initiate a trade when the risk is at least equal to the reward. This means that a risk-reward ratio of 1:3, 1:2, or 1:1 is acceptable, but not any lower.
- Keep a Diary: I have a notebook here that I’ll use to write down every day trading experience. This notebook will also contain other important day-to-day data.
- Establish Limits: $50 is enough as a profit for the first month. Regardless of how much I am dealing with, the risk limit remains 1%. I can’t risk more than 1% of the total capital.
- Determine How Much Capital You Have: $500 has been set aside for use as the initial capital.
Final Thoughts
Making a trading plan is essential for anyone who wants to trade successfully. Regardless of how comprehensive a Forex strategy is, it must include the points outlined in a trading plan.
Development of a trading plan requires practice — try the TickTrader platform.
Read more: https://fxopen.com/blog/en/how-to-develop-a-trading-plan/
Text source: Forex Trading Blog
