Forex Trading Plan: Why You Need it and How to Make it

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If you want to succeed in the Forex market, you need to be able to plan ahead. If you decide to dive head first into the Forex (FX) market without any preparation, the chances of you succeeding are very unlikely. You need to know what you're looking for, what your aim is, and how you plan to achieve your goals.

Forex Trading Plan - Why do you need one?


Many sources will stress the importance of Forex trading plans, not only for beginners, but also for the most advanced traders. This article will provide you with a better understanding of the importance and uses of a Forex trading plan, so that you can use the information to become a better and more successful trader.

What is a Trading Plan?
A trading plan in the FX market isn't really any different from any other trading plan you could imagine. It is an outline of your planned trading activities, something like a to-do list when it comes to trading Forex online. The main idea of the trading plan is to develop a set of rules that you are going to adhere to, and how you are going to implement them. Once you have the rules written, it is much easier to apply them, as there is a clear plan of action on how they need to be followed.

In addition to this, a trading plan can help you analyse the market better, and then apply your analysis to your trading strategy. A Forex plan can prevent you from making rash, irreversible decisions - something that is particularly useful when emotions start to come into play. They stop you making silly mistakes, and allow you to evaluate your wins and losses.

Making an FX Plan
In the beginning, developing a plan is rather simple. The first step is to determine the frequency of your trading. You may observe your account history and then determine how many trades you were opening on average per day or per week, and then what the average duration of your trades were. This is vital, as your plan should clearly illustrate the time dimension that you're going to be using in your trading. If you are a daytrader, your plan should be plotted over 24 hours.

If your positions tend to be close a few days after they have been opened, you would be better off illustrating your plan over a week. This is vital in order to understand how to develop a Forex trading plan. Once you have determined the frequency of your trading, you will have to either consider a day or a week as a dimension for your trading plan.

In some rare cases, you will have to use a month, but this is quite unlikely. Let's assume that you are a day trader, so we are going to consider a day as a unit of time for our plan. As we have determined this, it is now time to add the limitations to the trading plan. The rule of thumb is to take a number of your winning trades and then multiply the amount by 1.2. In other words, if on average a trader performs 20 trades per day, yet only six trades are winning ones, a trader should not trade more than seven trades per day.

Less opportunities

Typically, the idea of 'less opportunities' has a negative meaning, yet this is not necessarily true when it comes to trading. In order to understand how to make a winning Forex trading plan, we should acknowledge that every opportunity in FX market can bring both profit and loss.

Once you have decided to limit your trading to a set amount of trades per day, you will tend to focus on the trade with much more detail. Every trade that you will be performing will be analysed much closer, as with every unsuccessful trade, you will not only lose money, but you will also lose opportunities to open new trades that could have been winning ones.

Lower chance for emotional trading

Another important aspect of limiting your trades to a certain amount is to avoid trying to regain balance through emotional trading. Many traders encounter this problem more often than you would think. They end up losing money on the market, don't take time away to regroup and rationalise their decisions, and instead make hasty, often silly choices. Usually these traders will make additional trades to try and compensate for their losses. This is often done with an increased volume, creating a higher level of risk, and this is what leads traders to potentially lose even more capital.
 

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