What is a Forex Trading Plan and why is it important?

A Forex trading plan is probably the most important tool in your trading arsenal and, in my opinion, essential if you want to have any measure of long term success.

So what exactly is it?

It is a plan which you create by combining all of the necessary elements required of a successful trader, tailored to your personal preferences, personality and situation to give you a sort of road map to allow you to trade consistently in the long term.

It is not a set of rigid rules which you dare not deviate from at any time, more a solid foundation from which you can build your own style of trading safe in the knowledge that you have considered everything that you need to before you place any trade.

What are these elements?

These elements include such things as what time you have available to actually trade. Will you be part time, full time, evenings only? How much money are you prepared to allocate to your trading bank to finance your trading?

What do you hope to gain from your trading activity? A bit of extra vacation cash, the odd luxury item or a full time income to replace your current day job? What type of personality do you have? Risk taker, totally risk averse or somewhere down the middle?

Which analysis method will you use to help you make your trading decisions? Fundamental analysis, technical analysis neither or a combination of both?

Will you choose to trade intra day, in and out quickly for smaller profits or let your trades run for days, weeks or even longer for hopefully larger profits?

Which on-line platform will you choose to execute your trades?

All of these things need to be taken into account before you even begin to trade for real and must be done if you wish to be successful at all.

Putting your Forex trading plan together.

To begin with lets address when you will actually be trading. Where in the world will you be trading from? As you may well be aware the markets open in Asia and throughout the day pass through Europe, UK and USA before beginning in Asia the next day. In reality the UK and USA trading periods are the most active so will be best suited to intra day trading where you are placing short trades lasting from a matter of minutes or hours. The Asia trading period is usually quieter and often not active enough to trade intra day. If you are planning to trade over longer time periods of days or weeks then it does not matter when you trade as all trading periods will pass while the trade is in progress.

 

If you live in a country where the more active trading periods are when you are asleep or at work you may find it difficult to trade intra day.

Although it is perfectly possible to trade with a small trading bank to begin with I do not recommend it for reasons stated elsewhere on this website. This means that you need to be able to set aside at least $1000 which you do not need to pay your bills to place with your broker as your trading bank.

Next you need to consider what it is that you wish to gain from your trading. Are you looking for financial freedom, whatever that means to you? Do you just want some extra income to pay for a holiday, car payments or to treat yourself and your family once in a while? Or do you want to replace your current salary from your trading activity and trade full time?

Are you the type of person who will happily take a risk, albeit a controlled and well thought out risk in this case, or do you worry about taking risks in life generally? Are you a person who gets emotional when things go against you or can you keep a level head and ride the storm, coming back a stronger person next time?

I cover the different types of trading analysis here. Which will you choose to use if any? Which one suits your personality best, Technical or Fundamental?

There are many different on-line trading platforms happy to take your money to trade with them. Which one will you choose? Will you take recommendations from others or do your own research? Will you just pick the first one you come across? As with almost everything else in life some trading platforms are much better than others and you would be wise to choose carefully.

Once you have gone through the decision making process with all of these questions you will be a long way down the road in creating your very own trading plan ideally suited to your needs and personality.

Complete this exercise before you ever place a real trade.

As I have covered earlier in this piece it is essential to ask yourself all of these questions and actually answer them before you even consider placing a trade. You are doomed to fail otherwise. There is no other way if you want to be successful short or long term.

Once you complete this you may discover that you do not want to be a trader in the Forex markets after all. That is fine and may well have saved you a lot of misery and wasted cash.

Once you have gone through this process however you will have a much better understanding of your own preferences regarding Forex trading and this will stand you in good stead moving forward.

You will have bad runs of trades, all of us do and it is how we deal with them which separates the successful from the non successful. However bad your last trade was there will always be another one tomorrow.

Having a robust plan of action based largely on your personality, aims and aspirations and personal circumstances will help you to improve and gain more confidence as you go along. As I said it is not a set of rigid rules which you must adhere to at all times but a solid foundation on which you can rely and base each trading decision upon.

I hope you have found this information useful and as always I welcome any thoughts or comments you may have.

 

Filed under: Tools and Strategies

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