What Goes Into A Forex Trading Plan?
In the world of Forex, there are a few things that every successful trader can without a doubt agree upon, and one of those things is that you need a trading plan to succeed in Forex trading.
When you first start trying to make money in financial markets, you probably aren’t trading with any sort of trading plan or strategy, for that matter.
If you’re lucky, you’ll lose enough money early on before you realize that you need a plan when you come to play this game.
So what exactly goes into a trading plan?
A Strategy (An Edge)
Without this step, the steps that come after this don’t even matter. To start off, you’ll need to find/build a strategy or pattern that repeats itself in the marketplace that you can try and take advantage of.
This will be the TECHNICAL ANALYSIS aspect of your trading plan. Your strategy will determine what you’re looking to execute on the charts.
If you trade a system that has a negative expectancy, then again, it won’t matter what you do after that in your trading plan. To learn more about expectancy, click here.
Once you have a repeatable system that you can execute on the charts, it’s time to build the next part of your trading plan.
The next step is to get your mind right. Your trading plan is only as good as its execution.
If your trading plan is solid gold, but you have trouble following it, you will be inconsistent and always giving back profits.
This part of your plan is more of what you plan to do to get yourself out of your own way. For example, many traders struggle with revenge trading.
If you notice that you have a habit of trying to get profits back with trades that are off-edge, then you are going to have trouble being consistent.
One thing you might try is to take a break from your laptop or phone if you FEEL yourself becoming emotionally charged because that’s often how you end up making reckless decisions.
Journaling your feelings before, during, and after trades can help you become more self-aware if that’s a problem for you.
It doesn’t help to see errors in hindsight. You need to learn to catch yourself in the moment. BEFORE you make a mistake and then follow the precautions, you set for yourself.
After you have figured out how to get yourself out of your own way, then it’s time to get to business… literally.
How a business manages risk is critical to its survival. The same is true for traders.
I’ve recently heard someone call this “staying power.” How well you can make the losses smaller than your gains will determine how long you can stay in the game if things go south.
A risk plan is essential to a trading plan, but it is not as simple as thinking of a ratio you want to aim for when trading. It needs to set out how much risk you will put on when different scenarios occur.
So you can just risk a set amount once and end it there, but this will work against you when a trading drawdown eventually comes along.
In the same way, you set out plans to handle your psychology, you need procedures to help you manage risk. For example, if you lose 3 trades in a row, cut risk in half and keep it there until you win some trades again.
Something like this can effectively manage your losses during a drawdown and make sure you literally survive twice as long as you would if your drawdown continued.
Even though I mentioned having an edge in the first part of this article. Risk management is powerful enough to be an edge in and of itself, but it helps to have both aspects working for you to increase your chances of success.
Don’t bet the farm.
Don’t lose your shirt.
Cut the L.
Keep the W.