Forex trading plan
Today we will talk about a very important topic that will be of interest to both beginners and those traders who have already started making money on Forex , but cannot yet achieve stability in this process. All of you want to become professional traders, make quick money, buy expensive cars, travel the world, etc. Everything is in your hands, that’s why we came to Forex. It remains only to answer the question of how to learn to trade on Forex? Most traders who have managed to make a little money on Forex end up failing or trading either positively or negatively. What is the reason for these failures? All of you are looking for that one strategy, a kind of Grail that will give you financial independence. There is a category of traders who have been looking for the Grail all their lives, sorting through everythingstrategies , test them for years, find flaws in them and continue to search further. But let’s imagine that you have found your Grail, you start making your first money on Forex, and then your strategy simply stops working and you are left with nothing. Now let’s imagine how professional traders work. You’ve probably seen in the movies how traders trade on Wall Street, if not, then check out our selection of Forex movies… They do not have a clear strategy, they are trying to capitalize on every opportunity. Forex is a constantly changing market, if yesterday it was possible to earn a fortune by trading exclusively in gold, then tomorrow speculation in the grain market may turn out to be the most promising. What do all professional traders have in common? This is the presence of a trading plan – a set of rules that allows you to quickly decide when to open a trade and when to close it, what goals and limits for losses to set, how much to risk in a trade, without relying on intuition. Let’s take a closer look at how to draw up a trading plan and apply it in trading.
What is the difference between a trading plan and a strategy?
A trading strategy always answers three questions:
- What to trade? We look for inefficiencies and market patterns, conduct analytical work and testing, search for patterns and, as a result, find trading instruments that are in a trend or will soon be in a trend;
- When to trade? This is a search for a working timeframe and a market entry point (rollback, breakout, etc.);
- How much to trade? This is where money management issues are resolved.
But a trading plan answers the following questions: how to trade, how to fulfill the tasks, how to achieve a positive mathematical expectation, how to get an advantage over the market, etc. A trading plan is a written set of rules that helps us automate the trading process. Having a trading plan at hand, we must clearly understand where we are entering, what should be formed on the chart in order to enter a trade, where to place a stop, what targets to take to exit the trade, etc.
Why do you need a Forex trading plan?
When trading on a demo account, as a rule, you do not think about whether you will lose funds or not. At the moment, you are in an experimental state, so you understand that the deal may not take place, and take your stops calmly. When you risk real money, at the moment of making a deal, you immediately have an internal dialogue – to enter into a deal or not. So having a trading plan helps you focus on trading without being distracted by thinking about decisions. But for this you should not just know your trading plan, but write it down in some form, so that when a controversial issue arises, you turn to your set of rules and see what to do in this case. It can be an A4 sheet, a notebook on a computer, an application on a smartphone – it doesn’t matter, the main thing is that it is always at your fingertips.
Who will benefit from a trading plan?
Let’s remember the phases of development of traders and relate them to the trading plan:
- Unconscious incompetence. In this phase, a trading plan will not help you, since you are in a state of knowledge accumulation, trading rules can be reduced to simplified actions, for example, the price crosses the moving average from bottom to top – buy, from top to bottom – sell;
- Conscious incompetence. This is where experience is gained, the trader realizes that he does not have an understanding of the market patterns. After testing strategies, working on a demo account and in the historical data simulator, the trader proceeds to the next phase;
- Conscious competence. Most of the traders who have already smelled the first money in Forex, but have not yet reached the mastery of trading, are in this phase. Just in this phase, the presence of a prescribed trading plan allows you to perfect your decision-making skills and achieve success in trading;
- Unconscious competence. Traders in this phase have a well-developed mechanism for making quick decisions, and they do not need a trading plan. An example is the trade of professional traders on Wall Street, who make up to 300 trades a day, making quick decisions on an intuitive level.
See also which scalping brokers allow this type of trading.
How to create a trading plan?
When drawing up a trading plan, you must be guided by the following criteria:
- Money management. You must clearly define for yourself what percentage of the deposit you will risk in each transaction. This is the most important criterion, if you do not follow it, you will not be able to achieve positive results in trading;
- Determination of entry points. Next, you must choose which market pattern you will use when entering a trade (trend following, level breakout , pullback from the level, candlestick patterns, etc.) and accurately prescribe the sequence of actions to enter the market. For example, a bullish candlestick tested the level with its tail, but closed below it – open a sell trade;
- Setting stop losses. Many traders neglect this point, but without stops it is impossible to build an effective trading system. What is stop? This is the limitation of losses. That is, you need to choose an entry point so that you can enter the market with a minimum stop and take profit exceeding the stop by at least three times. If the stop loss is triggered, you do not need to panic, since you have fulfilled the necessary condition of the trading plan – you have limited losses. If you had not done this, then the stop loss could be equal to the entire deposit. And so you just lost a small part of the deposit, and if the stop-to-take profit ratio is 1: 3, then even after three stops in a row and one profitable deal, you will at least stay with yours. There are the following types of stop loss placement:
- stops as a percentage of the deposit;
- volatility stops (ATR indicator);
- stops behind extremes;
- stops behind levels, etc.
- Position tracking. Then you need to prescribe how you will exit the market. There are several ways to support an open position:
- all in / all out is the most popular method among intraday traders (for example, they entered with a volume of 0.1 lots, after a while they completely closed the deal by take profit or manually by the strategy signal);
- anti-pyramiding – partial closing of a position (for deals with a maturity of more than one day);
- pyramiding – additional opening of deals according to a trend (for positional traders);
- Trailing Stop is an MT4 tool that you can learn more about here .
Thus, the development and strict adherence to a trading plan will allow you to quickly overcome your psychological barriers that prevent you from making money on Forex. When you deviate from the trading plan, making entries several points earlier than the strategy requires, lowering take profit and moving stops in the process of trading, then you create a kind of artificial slippage, worsening the statistics of your trading. At first glance, this is not striking, but if you collect statistics for a thousand transactions, then your actions will noticeably affect the trading results. Therefore, try to follow your trading plan, write a set of rules on a piece of paper so that it is always in front of your eyes, so you will quickly learn how to trade effectively and move into the phase of unconscious competence.