Steps To Making An Effective Trading Plan In Forex

by Alex Hales
fx

If you’re not planning your trades forex, you’re essentially paving the road to failure. Any experienced trader who is able to earn consistent returns would tell you that you have two alternatives–either you stick to the written plan or be prepared to fail. Download metatrader 4 app

In case you already have an investment plan in place, well welcome to the minority club! Creating a plan requires time, effort, and research to come up with an approach or methodology that can work effectively in the financial world. Though nothing can bring guaranteed success, when you create a forex trading plan, you overcome a major obstacle in your way.

Trading is a business

The key to success in forex trading is to treat it like the business it is. Simply skimming through a few books, buying a charting program, opening a brokerage account, and then trading with real money is not a recipe for success.

A good plan is one that is written and has clear signals that cannot be changed as you trade but can be re-evaluated once the markets close. The plan could change depending upon the market conditions and there may even be slight adjustments to it as you advance as a trader. Every trader must jot down their trading plan and make sure they take their trading styles and goals into account. Working with another trader’s plan would not do justice to your trading characteristics.

The master plan

Since no two traders are alike, no forex trading plans can be identical. Every approach would be a sign of a trader’s trading style and risk appetite. Below are some more essential aspects of a good trading plan.

1. Do you have the skills?

Do you think you are ready to trade? Were you able to try out your system by paper trading it?  Do you think it has what it takes to work in a live trading environment? Would you be able to trust and follow signals confidently? Market forex trading is essentially a matter of giving and taking. The professional players are all set to take profits from the crowd who typically do not have a plan and tend to make expensive mistakes.

2. Are you mentally prepared?

What is going on in your mind? Are you calm and well rested? Are you ready for what’s coming your way? If you don’t feel confident enough mentally and emotionally, it is best to avoid trading that day or you may lose it all even before you realize it. Several traders have a routine or a market mantra that they follow or chant before trading. Find your mantra or routine that would put you in a zone where you are able to focus on trading. Make sure you trade in a distraction-free zone.

3. What is your risk tolerance?

What percentage of risk should you take on one trade? This is something that will be determined by your forex trading style and risk tolerance. The amount of risk could change but it should probably range between 1% to 5% of your portfolio on any given forex trading day. This implies that if you’ve lost that percentage of your funds, you exit the market and don’t start a fresh trade.

4. Setting goals

Be realistic about your profit targets and risk/reward ratios before you open a trade. How much minimum risk/reward will you accept? Several traders would not trade if the profit potential is not at least three times higher than the risk. Let’s say that you’ve set your stop loss to $1 per share, your aim must be to earn at least $3 per share in profit. Get into the practice of setting weekly, monthly, and annual profit goals in dollars or as a percentage of your portfolio, and revisit them from time to time.

5. Do your research

Be sure to get the hang of what is going on around the world before the market opens. How are the overseas markets performing? Are S&P 500 index futures high or low in the pre-market? Index futures can be helpful in getting a sense of the market’s mood before it opens. This is because futures contracts are traded day and night.

Do you wish to trade ahead of an important report? That’s for you to decide on the basis of the various factors that affect the market but for a majority of traders, waiting out is better since you can never be sure how the volatility would affect the market.

6. Trade preparation

Regardless of the trading system and program you use, identify and mark the major and minor support and resistance levels on the charts. Turn on alerts for entry and exit signals and ensure that these signals are easy to spot and detect.

7. Set exit rules

A large number of traders focus on searching for buy signals, but often do not emphasize enough their entry and exit. You could be wrong and even your stop could get hit but it is part of the learning process. Even professional traders lose but they manage to keep their profits steady by managing their risks well.

8. Set entry rules

You may be wondering why this follows setting exit rules. Remember that exits are much more crucial than entries.

Your system needs to be complex and effective, but also it should be easier to make quick decisions within that system. Among 20 different conditions that need to be taken into account and part of them are subjective, making trades could be hard. It is true that sometimes,  computers crack better deals than real people, which is probably why major stock exchanges carry out trades with the help of computer programs.

9. Document everything

Several great traders also happen to be great at record keeping. They like to be in the know about what led to their wins or loss so they can follow the same steps or not repeat their errors. It is good practice to maintain a written record of targets, the entry, and exit of a trade, the time, support and resistance levels, daily opening range, and market opening and close for the day. Also, jot down what led to those decisions so you also have the lessons learned in place. Visit multibankfx.com

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