Why a Trading Plan Is Essential in Forex Trading

February 17, 2017Diana Lengerson

Forex trading can be an interesting way to try and make a profit on your capital. A lot of people, when they first get into the idea of trading foreign currencies for profit, dive in without really planning anything or setting any rules to trade by, and this is not only a more stressful and scary way of doing things, but also far more risky than starting out with a good trading plan.

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Equally, if you have been trading for a while and already have an account on a good platform like ETX Capital, but want to get more from your trading and gain better results, as well as upping your game and working more like a pro, a forex trading plan can be a big step in the right direction, and can structure how you operate in a way that is far easier to manage, refine and improve.

Here, we look at some of the things you should think about when forming your own trading plan, and why each of them can help you become a better forex trader and reduce risk:

What Time Period Counts as a Unit On Your Plan?

The very first thing to concern yourself with is when you open and close your trades. If you are a day trader (or that is what you intend to be, if you are not trading yet), then a 24 hour period would be a unit of time for your plan to work over. However, if you tend to open and close within days, then a plan that covers a week of your time is going to be easier to work with. The idea is that you shouldn’t have trades open between one unit of time on your plan and another. Some traders may even want to set plans that cover a whole month, however these are rarer cases, so for most new or intermediate traders, day or week plans are appropriate.

The reason for doing this is so you structure your sessions in line with a plan, and can set your rules for trading to apply to how you want to trade. If you trade in day (or overnight) sessions of a few hours, then you approach things differently to people who trade over days and are therefore leaving their trades unwatched at certain times.

How Many Trades Per Session Can You Make

One of the most important primary rules you should set in your trading plan is how many trades you will make per day. While it may seem crazy to set a maximum when you want to be in there making trades and doing stuff, this is an important part of managing risk. Yes, you are taking less opportunities, however each trade is both an opportunity for profit and an opportunity for loss. The rule many professionals use is to multiply their number of successful trades per day by 1.2. This will leave you with a number you can set as a rule, for example you may be able to make 6 trades a day if you are a day trader.

Sticking to your trade limit has several very important benefits. You will make sure you only go in on trades you are really interested in doing, and you’ll have a lot more ability to focus on and keep track of the ones you do make. It also reduces the panic a little. Every day brings new opportunities, and when you limit yourself to a fixed number of trades you will lose that sense that everything you’re not doing is something you are missing out on, as well as feeling more organised and prepared when things are moving fast.

When Will You Stop Loss or Take Profit?

In gambling, successful gamblers know when it is time to take their wins and leave the table, and when it is time to accept a loss rather than getting into a worse situation by persisting to try and recoup. They don’t do this by instinct, contrary to what some people think, but have usually got carefully calculated limits on what they can accept as loss and what is likely to be their best profit, based on things like their bankroll.

As a forex trader, you need to do the same thing. Yes, it can be tempting to hang onto something that has already lost you money in case it bounces back, and yes, something that is on the rise can also seem like it is worth keeping to see if gains increase, but if you have a fixed point where you’ll stop loss or take profit, then you are avoiding doing these risky things as an emotional response, and are doing the most prudent and logical things as an investor.

Emotional trading is the one thing you really need to avoid, and it is something that even high level traders can fall victim to if they don’t stick to their own rules.

What Are Your Criteria for Entering a Trade?

At first, when you don’t really know what you are doing, it can be tempting to read some predictions, look at some charts, and just sort of start making trades that seem nice. You’re kind of going in the right direction with this approach, because learning how to do analysis and follow the news about your currencies is important, however you will feel far more like you know what you are doing and trade far less erratically if you set yourself criteria for opening a trade.

What your criteria are will depend on your own style, the pairs you’ve chosen and why you’ve chosen them, how long you keep trades open, and other factors. So, research this and make sure you find something you are comfortable with – then stick to it. And guess what? You need to do the exact same thing for your criteria for exiting a trade, if you don’t have to exit it from hitting your stop loss or take profit levels.

Once you have your plan, you are ready to begin trading like a pro – but remember, your plan is only worth anything if you stick to it with no exceptions!

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