In this article, we will convey knowledge in a progressive manner, from basic to advanced, for traders. With a logically organized series of lessons, our aim is to enable traders to easily access the knowledge and have the necessary tools to confidently participate in this risky market.
All those who have made history never engaged in battle without a plan, and the same goes for a great trader. Learn how to create a Forex trading plan that answers four questions: What? Why? When? How? through the following lessons!
Forex Trading Plan
Having completed half of your journey at Forex University, it is important to remember this advice: Trade according to your own style. In other words, don’t blindly follow others’ trading recommendations!
The fact that someone may excel using their own method does not guarantee its effectiveness for you. We all face different circumstances in life and possess unique market perspectives, thinking processes, risk tolerances, and market experiences.
Develop your own Forex trading plan and adapt it as you learn from the market. Continuously improving and adhering to your trading plan are two essential elements of trading discipline. However, even unwavering discipline is insufficient; it must be as solid as a rock, as steadfast as the Great Wall of China.
Is a Forex trading plan crucial?
A lax discipline is akin to a stretchy straw, rendering you vulnerable to being devoured by the market. We all aspire to become successful traders! Firm discipline is the foremost characteristic of accomplished traders.
A Forex trading plan delineates what actions to take, why, when, and how. It encompasses trading styles, personal expectations, risk management principles, and trading systems. When implemented, a Forex trading plan helps mitigate errors and minimize losses.
In conclusion, if you fail to plan, you are planning to fail. A Forex trading plan eliminates any poor decisions during critical moments. Emotions can lead to financial losses and irrational decision-making. And you certainly don’t want that to happen.
The best way to prevent such occurrences is to minimize (note that we’re not saying eliminate) emotions by implementing an observation plan when significant price actions occur. With a well-designed Forex trading plan, all actions are pre-determined, ensuring that you don’t have to make any impulsive decisions during crucial times. You simply adhere to the Forex trading plan.
The distinction between a Forex trading plan and a trading system
Before we proceed, it’s essential to quickly differentiate between a Forex trading plan and a trading system. A trading system outlines how you will enter and exit trades. It is a component of the Forex trading plan, albeit just one of the crucial elements, which includes analysis, feasibility assessment, risk management, and more.
Due to the ever-changing market conditions, skilled traders often incorporate two or more trading systems within their Forex trading plan.
The importance of a Forex trading plan for traders
A Forex trading plan greatly simplifies the trading process. Consider it akin to using a GPS device. You input your desired destination, and it shows your current location and the route to your intended destination. You can continually monitor the GPS to ensure you’re on the right track.
If you make a wrong turn, it recalibrates and guides you back onto the correct path. A Forex trading plan acts as your GPS, assisting you in reaching your destination of consistent profitability.
Traveling without GPS is not a smart idea. You won’t know how to reach your destination and there’s a high chance of getting lost. Similarly, engaging in Forex trading without a trading plan is like driving without GPS – it’s a poor decision.
Your goal is to achieve stable profits, but without a specific plan, you run the risk of depleting your trading account. With a Forex trading plan, you can assess whether you’re heading in the right direction. It provides a framework to continuously measure the effectiveness of your trades, enabling you to trade with less emotional involvement and stress. Traders should not be reckless gamblers!
Without a well-defined Forex trading plan, attaining consistent profits becomes nearly impossible. You’ll end up as a reckless gambler, making impulsive decisions and compromising your chances of survival. This is not trading – it’s akin to gambling!
Whenever you experience losses without a plan, you’ll find yourself in a state of painful distress as your capital diminishes, wreaking havoc on your psychological well-being. A Forex trading plan helps identify the path to stable profits and allows you to evaluate whether you’re moving in the right direction.
Most importantly, when facing losses, a trading plan enables you to easily pinpoint the issues arising from your Forex trading plan or from deviating from it. Without a plan, you remain oblivious to your mistakes and lack a means to assess your performance, resulting in a perpetual state of instability.
Failing to plan is essentially planning to fail. While a Forex trading plan cannot guarantee success, a well-crafted plan will enhance your ability to survive and maintain a long-term position in the Forex market.
EXISTING is more important than failing, and that should be your primary objective as a new trader. Keep in mind that 90% of new traders lack a Forex trading plan, which clearly puts them in the group of failures. Strive to be part of the 10% successful group by having a specific Forex trading plan.
We have never seen a professional trader without a Forex trading plan. While you can still engage in trading without the necessary skills, not having a clear and disciplined Forex trading plan to consistently follow will make it challenging to earn profits. Don’t miss out on this opportunity. Make sure you have a Forex trading plan.
Why discipline in trading is the key to sustainable profits
What happens when you deviate from your Forex trading plan but still make profits? It’s merely a random stroke of luck that provides temporary joy. However, engaging in such foolish trading can have a negative impact on your ability to maintain long-term discipline. Trading is a marathon, not a 100-meter sprint!
When you veer away from your Forex trading plan and still achieve wins, you may feel pleased because the lack of discipline seems to bring profits. This might lead you to believe that abandoning the Forex trading plan is acceptable. Undeserved rewards can instill a tendency to forgo trading plans in the future.
It’s easy to think, “I’ve been rewarded once, maybe I’ll be rewarded again. I’ll have even more opportunities.” However, positive outcomes from undisciplined actions are usually short-lived, and the absence of discipline ultimately leads to the depletion of your account. It’s important to distinguish between legitimate and undeserved wins.
A legitimate win occurs when you create a highly detailed Forex trading plan and generate profits from it. Winning through adherence to your Forex trading plan helps solidify your discipline. On the other hand, an undeserved win happens when you deviate from your plan or don’t have one at all. You might still make profits, but the results are purely coincidental and short-term.
You can also employ the flip of a coin to aid you in decision-making. However, achieving victory solely through chance is unjustified and leads to undisciplined trading. Upholding discipline is crucial for consistent and profitable trading. Trading involves steadfast adherence to a set of proven strategies, repeated consistently, which activates the law of probability to yield overall profitability. It is akin to shooting basketballs into the hoop to accumulate winning points. The more shots you take, the greater the likelihood of accumulating points.
The true winner is the one who becomes adept at making smooth and precise shots, ensuring that every opportunity has the potential to result in a successful basket. Athletes develop their skills by focusing on a specific shot type during a designated period, thus exemplifying consistency.
Trading operates in a similar manner. Consistency is key, necessitating adherence to a well-defined Forex trading plan for each transaction. Engaging in different approaches at various times would be futile. This cannot be emphasized enough. Allowing the law of probability to unfold through a series of trades is crucial in achieving overall profitability.
Deviation from the plan at different intervals would disregard the principles of probability. Profitability stems from disciplined trading. Do not let irrational victories (undisciplined ones) hinder your ability to maintain discipline. Execute your own Forex trading plan, firmly believing that by adhering to it, you will secure greater long-term profits.
Find out how to trade that works for you
The first step in constructing a Forex trading plan is to gain a comprehensive understanding of yourself. The trader themselves serve as the foundation of the Forex trading plan, as they will be the sole user of it. It is through self-awareness that you will reveal your trading style and find a suitable trading approach.
You are the one who determines which method is suitable. Trading strategies, systems, and approaches that do not align with your nature and personality will significantly diminish your chances of success. Many traders adopt various trading systems without considering their compatibility.
Instead, investing time in researching and self-reflection from the outset can save a considerable amount of time and money. Prior to contemplating clicking the Buy or Sell button on the trading platform, it is essential to question yourself in order to develop a more effective Forex trading plan. Compose a set of questions and answers. By writing down responses to the questions you pose, you will be reminded of what actions to take and ensure adherence to the plan.
Now, are you prepared for some questions and answers? In the subsequent sections, you will respond to a series of questions to gain further clarity on your trading style and shape your Forex trading plan.
What motivates you to become a trader?
Why do you aspire to become a trader?
Is it to amass wealth through dubious means? That certainly sounds thrilling, doesn’t it? Is it because you seek personal challenges? Or is it because the person you admire is involved in currency trading, and you wish to impress them?
Understanding the true motivation behind your desire and determining whether trading is suitable for you are crucial considerations.
Traders who approach their profession without seriousness will quickly be eliminated by the market.
For instance, excitement and consistent profits don’t always go hand in hand. You can experience the thrill of betting in a detached and playful manner, but believe us, you won’t be grinning when you see your money going up in smoke right in front of you while trading.
If intense sensations are what you’re after, head to a casino, skydive out of a plane, or try driving an F1 race car. That’s where the real thrill lies! And you might even end up spending less money compared to trading.
What do you need to do to establish trading goals?
This is accomplished by setting profit targets (in terms of currency or percentages) for each time period. For example, you could choose a goal like earning $4,223,834,145.53 per month or achieving a 529% profit every week.
It doesn’t necessarily have to revolve around money. Just like my trading goal is to earn enough to buy a bottle of Louis XIII for relaxation every weekend. Or my goal is to have enough money to ride a Ferrari Portofino for every romantic picnic.
Sounds enticing, doesn’t it? Unfortunately, we were just kidding! Everything has to be about money. Regardless of the goal you decide, make sure it is a realistic and measurable figure.
Setting trading goals will help you develop into a professional trader
You can’t afford to be vague, like “I want to become wealthy.” It needs to be crystal clear, like “I want to become super wealthy.” Be practical! I want to earn 1% every week. I want to achieve a 50% profit by the end of this year. I want to double my account in six months. I don’t want to make any trading mistakes in a day.
The more specific your goals are, the easier it becomes to track and evaluate your trading effectiveness. If they lack specificity, you will end up wasting time fruitlessly.
What is risk capital? How much money are you willing to lose in a transaction?
How is your personal financial situation?
You need to assess whether you have the capability to engage in trading. Forex trading should only be conducted with risk capital. Risk capital refers to the funds that, if entirely lost, will not have a significantly adverse impact on your financial well-being.
Risk capital is the money you can afford to lose.
It is the type of money that, if lost, will not result in losing your home, car, spouse, limbs, organs, etc. Avoid risking what you cannot afford to lose!
If you are using money that you need to cover bills, it will negatively affect your ability to make unbiased decisions. Imagine the stress you would experience if a trade was opened and then you had no food in case of a stop loss. Every pip going against you would mean missing a meal!
You surely don’t want to go hungry and be homeless, do you? Unless you intentionally choose to do so. In that case, you might proceed and risk all the remaining money in Forex. Don’t act foolishly! Utilize your intellect.
Don’t start trading with real money until you have accumulated sufficient risk capital. Be satisfied with demo trading until you have enough funds! Disregard the advice of brokers and the clamor from the crowd urging you to deposit money because you are the one losing money, not them. We will assist you in risk management in the subsequent lessons.
How much time can you dedicate to Forex trading?
You should seriously consider how trading will affect your current lifestyle.
It is important to determine how much time you can dedicate each day/week/month (depending on what is most suitable) to market analysis and risk management.
The time frame plays a crucial role in defining your trading style. The shorter the trading time frame, the more time you need to spend analyzing charts. If you are a day trader and actively enter and exit trades throughout the day, you will need to keep your eyes on the screen for the entire duration.
On the other hand, longer trading time frames require less market monitoring. You may only need to check your trades after a specific interval. Remember to consider the potential for fatigue!
When you mention being able to trade for 8 hours a day, does that mean dedicating 8 hours solely to focusing on charts and analyzing economic data without any other distractions? Or does it include time for preparing meals, spending time with your children, walking the dog, or using social media?
This is especially important for scalpers, as not being fully focused on observing charts can lead to missing out on entry and exit points.
You need to allocate time to develop and refine your trading system.
Your trading system will require you to closely examine charts and identify entry/exit points. Risk management is crucial while actively trading. After exiting a trade, you need time to review the trade and seek opportunities for improvement.
You also need time to document your thoughts and actions in your trading journal. The amount of time required for all these tasks will depend on your trading system. Of course, your trading system needs to consider the time you allocate for trading during the day.
This is a scenario where you have ONLY ONE trading system. You should repeat this process for every trading system you want to utilize. The final step is to adhere closely and successfully execute the devised Forex trading plan.
What types of profits do you anticipate in forex trading?
I want to make money! Naturally, anyone interested in Forex aims to earn money.
Trading entails risks, and profits serve as rewards for assuming those risks. There is no doubt that every trader desires to earn profits. The question you should ask yourself is: What profits do I expect? And how much risk am I willing to tolerate?
Your answer significantly influences the determination of trading styles, currency pairs, and trading timeframes. Most importantly, it pertains to the risks associated with profit objectives.
Mario and Luigi
There are two forex traders, Mario and Luigi. Luigi is seeking to earn 10% annually, while Mario has slightly loftier ambitions. He wants to DOUBLE his account and make a staggering 100%! It is highly likely that Mario will have to engage in more trades and assume greater risks compared to Luigi. He will have to confront higher potential losses if he wishes to achieve the 100% profit goal.
Traders must also consider drawdown statistics. Drawdown refers to the distance from the account’s highest value to the subsequent lowest point. (We will explain this in more detail in a future lesson.)
Each trader must determine the maximum capital they can afford to lose in pursuit of their profit goals. On one hand, some traders dislike risks and prefer small monetary losses. However, this approach also restricts potential profits. On the other hand, there are traders who are comfortable with substantial losses as long as their system generates immense profits.
You should also consider how much time you can allocate to trading. If you are unable to dedicate a significant amount of time to working on your trading system, reading about the financial market, learning new trading techniques, and keeping a trading journal, we can assure you that you will face difficulties in generating profits.
If you are unable to achieve your goals, you may need to adjust your profit expectations to align with your capital and trading style. Success depends on YOU. You must possess discipline and transform discipline into a consistent habit in order to adapt your skills and learn from avoiding the market when it is unfavorable.
Daily trading preparation habits
What are your habits before engaging in trading? Let’s exclude waking up. The habits before entering the market hold great importance. Do not assume that you can simply jump out of bed, sit in front of your computer, activate the trading platform, and effortlessly make winning trades as if they were low-hanging fruits from a tree.
What activities will you undertake BEFORE starting to trade?
We are not referring to taking a shower and brushing your teeth here.
The daily habits before forex trading include:
- Reviewing all open positions and making necessary adjustments
- Reviewing trades from the previous day
- Keeping up with the market’s pace.
- Identifying upcoming news events that could cause market volatility
- Being prepared to trade when the next trading session opens
Now, you will assess the overall market news. Visit Vnforex, Bloomberg, or tune in to television channels such as CNBC, Bloomberg TV, BBC. What is the general market sentiment? Consider the trades from the previous day and the completed trading sessions to identify crucial market levels such as support and resistance. It is now time to begin trading according to your system!
Preparing before a trading session is crucial for your success.
Developing good habits can help you effectively plan your Forex trades, saving you time from researching upcoming news or data releases and preparing for market volatility.
Start each trading session with a calm and relaxed mindset, ready to face the challenges the market may present. Stay updated on fundamental principles and technical analysis that impact the foreign exchange market. Regularly refer to an economic calendar. A trader without a plan is prone to depleting their trading account.
When it comes to trading tools, what hardware and software will you utilize?
You will require a PC or computer hardware, software, reliable data sources, and a stable internet connection.
Do not forget to have a backup plan! Ensure you have contingency measures in place for Forex trading in case your tools encounter errors during trades. What if your computer experiences a malfunction and fails to restart? What if your internet connection gets disrupted? What if there is a power outage? What if your keyboard stops functioning?
Lastly, do not fall into the trap of unreliable brokers who aim to deceive you. Safeguard your funds and consider alternative sources of capital. Which brokerage platform should you use? Where will you execute your trades? You cannot simply call a bank and say, “I want to buy the EUR/USD pair.”
While this might have been possible in the past (assuming you had a million USD), we are now living in the 21st century. Time is money, and utilizing online trading platforms helps save time! However, it is not a straightforward process.
Learn more: Building an Effective Forex Trading System
Ensure that the brokers you choose are reputable and offer stable deposit and withdrawal processes. Invest time in researching the broker’s credibility. You will not regret it!
21 Questions to Address in Your Forex Trading Plan
One of the primary reasons why many businesses fail is due to a lack of a solid business plan. To achieve success in both life and business, having a plan is crucial. Trading in the Forex market is no exception; a clear and well-defined Forex trading plan is essential.
“Failing to plan is planning to fail.”
In other words, those who do not approach their Forex trades with a business mindset are likely to fail. Presented below are 21 critical questions that you need to answer when formulating your Forex trading plan.
- What specific reasons drive your desire to become a trader?
- What are your expectations and goals from trading?
- What is your greatest strength?
- What is your biggest weakness?
- How will you address and overcome your weaknesses while leveraging your strengths?
- What distinguishes you from unsuccessful traders? (Simply working hard is not sufficient; many diligent
- traders still fail.)
- Do the aforementioned factors genuinely provide you with an advantage in the market?
- Which markets will you trade in, and why have you chosen them?
- How much time can you allocate to monitoring the FX market as well as the overall financial market?
- What is your preferred trading style? Do you have a plan for day trading, swing trading, or long-term trading?
- Does your trading style align with the time commitment you can afford to make?
- During which specific times of the day (or week) will you allocate for trading, research, and market analysis?
- What trading systems or criteria will you employ for entering and exiting trades?
- What is your risk management strategy?
- How will you determine if your trading system or strategy is flawed?
- Once you identify a flawed trading system or strategy, how will you address and rectify it?
- Which trading software and equipment will you utilize, and what are the associated costs?
- Which broker will you select? Is the broker reputable?
- How much capital do you plan to invest? Is this an amount that you can afford to lose without negatively affecting your current standard of living?
- Do you have a plan for increasing your capital in your trading account, and if so, where will the additional funds come from?
- If you generate profits, do you have a plan for reinvesting the profits or withdrawing a portion or all of the funds?
If you are genuinely committed to your profession, take the time to reflect on the above questions.
Consistent growth and success require direction and a clear sense of purpose. A well-defined roadmap with established goals and responsibilities, subject to modifications when necessary in your Forex trading plan (such as when a trading system or strategy becomes ineffective), is crucial. This is a positive aspect, as without a clear plan in place, you would be unaware of the need for change.
Risk can transform into opportunity, but it is essential to identify the risks first. As evident from the above, there are numerous factors to consider before executing buy or sell orders on a trading platform. While answering each question does not guarantee success, neglecting to address these questions will almost certainly result in failure. The quality of your Forex trading plan often correlates with the level of profitability. Strive for success and avoid failure.
A Forex trading plan is only effective if you adhere to it. You need to stick with it. While it may sound simple, most traders still struggle to do so. Why is that? It’s because of lack of compatibility!
A highly personalized Forex trading plan is essential. A plan should align with profit goals, risk tolerance, and personal lifestyle. It must be developed based on your individual needs, without losing sight of the fact that the plan should be tailored to YOU, not influenced by your girlfriend or friends.
A Forex trading plan must be based on reality, not hope. Trying to simply copy someone else’s Forex trading plan will lead to incompatibility and difficulties in implementation. SOLUTION: Be honest with yourself first.
A Forex trading plan is a long-term commitment. However, many traders abandon their Forex trading plan, particularly the trading system within the plan. Why? Because they can’t handle a losing streak. Consequently, they give up. SOLUTION: Be patient!
Following a plan requires consistent adherence over the long term. It’s not just about discipline; it must be unwavering discipline. Forex traders who lack discipline and fail to stick to their Forex trading plan end up depleting their accounts. SOLUTION: Maintain discipline!
Self-sabotaging behavior: Negative psychology has deeply rooted itself in the minds of many traders, and this will sabotage them. This can be addressed through diligence, but traders must first become aware of these issues. You can’t find a solution if you don’t know the source of the problem.
When you deviate from your Forex trading plan, you become undisciplined, leading to failure. An unjustifiable profit increases the tendency to abandon the Forex trading plan in the future. “I’ve won once; maybe I’ll win again. I’ll have more opportunities.” However, the short-lived positive results of undisciplined trading ultimately result in significant capital losses.
Distinguish between legitimate and irrational wins. A legitimate win occurs when you create a highly detailed Forex trading plan and achieve success as a result, reinforcing discipline.
An irrational win happens when you deviate from the plan. You may make money, but this outcome is purely coincidental. It’s like flipping a coin to make a trading decision. Irrational wins can promote undisciplined trading. SOLUTION: Continuously self-assess.
If you find it difficult to adhere to your Forex trading plan personally, it may be due to one of the aforementioned reasons. If so, refer to the solution: Consistency is key! Maintaining discipline is vital. Trading is a process that enables the law of probability to work in your favor.
Focus on executing a proper trade rather than pursuing a profitable trade. Consistently trade according to a specific plan for each trade. If you employ different methods for each trade, your success rate will be low and inconsistent. Moreover, you’ll struggle to identify which strategies are effective and which are not.
Discipline comes with profitability. Don’t let profits from incorrect trades erode discipline. Stick to your Forex trading plan and reinforce the belief that by following the plan, you’ll achieve greater long-term profits.