The use of a Forex trading plan is equivalent to the construction of a house after designing it on paper. One can always build a home without a blueprint, but the outcome will probably not be very good.
Similarly, you could start Forex trading without a plan, but you could never aspire to become a good Forex trader, capable of making consistent profits.
There are different types of traders and a Forex trading plan is subjective and unique for each trader. In other words, a trading plan is created based on the personality, style, available funds, objectives, and time of each trader. This means that you cannot use the trading plan of another trader. You have to create your own if you want it to work.
If you’ve never created a trading plan, don’t worry. This guide will help you in every step of creating a Forex trading plan. We’ll also break down some simple forex trading plan examples to help you navigate this exciting but challenging world.
What is a Forex trading plan?
A Forex trading plan is a set of rules that a trader is required to follow when trading on the FX market.
Therefore, a trading plan consists of elements that describe the activity of a trader.
The plan must include the following:
- Money management: It’s all about deciding how much you’re willing to risk on each trade.
- Goals: What do you want to achieve with forex trading? Be specific. Are you aiming for a steady income or long-term wealth?
- Trading strategies: Strategies can be technical (charts, indicators) or fundamental (news and economic events)
- Trading indicators: Examples include Moving Averages, RSI, and MACD
- The time frame: Short time frames (like 1-hour) give quick snapshots, while long ones (daily or weekly) show the big picture
- Stop Loss: It’s the price at which you say, “I’m out” if the trade goes against you.
- Take Profit: Take profit is your exit strategy for winning trades. It’s like saying, “I’m happy with this profit; I’ll cash out now.”
- Duration of trade: How long will you hold a trade? Hours, days, or even minutes? This depends on your strategy and goals.
- Instruments: These are the assets you’ll trade, like EUR/USD (Euro/US Dollar) or GBP/JPY (British Pound/Japanese Yen).
- Trading platforms: Popular ones include MetaTrader and TradingView
- Suitable FX brokers: Look for a reputable broker with good customer service, low fees, and a user-friendly platform.
It’s not simple but you have to imagine it as a road map, a guide that tells you what to do in every market situation, both before and during the trade.
A good Forex trading plan will probably limit your trades a lot, but will make it more effective, avoiding entering the market just for the frenzy of doing it or for the euphoria of some particularly exciting news.
Anyone who doesn’t use a Forex trading plan is likely to “get lost” in the ruthless world of Forex. Being guided by instinct and fear of losing always leads to making some of the common Forex trading mistakes a beginner should avoid.
That said, let’s proceed with this guide on how to create a Forex trading plan.
How to create a Forex trading plan
Don’t be in a hurry! Take all the time you need to create your Forex trading plan that will make trading much easier.
Trading diary
Getting into the mentality of keeping a diary right away is essential.
You can use both PC and pen and paper but the trading plan must be written down and it must not be a simple list of points, it must describe why making one choice rather than another.
Whatever the reason that drives you to become a trader, write it down, it will help keep you focused on the goal.
If you want to make the most of the Demo tests you must be scrupulous in recording all the data deriving from your trading plan.
Don’t be afraid to write down your failures and failure to achieve your goals. It is impossible to get a trading plan right right away, it takes time and a lot of patience.
Until the data is constant, you won’t even be able to think about switching to real trading.
Goals
Before making any trade, you should be clear about your reason for trading an instrument. At this point you have to make a note, writing down the goals you set yourself to achieve with trading. To write them, follow these simple rules that help you to be more precise.
These objectives must be:
- Attainable, you can’t get rich in a month or even in 6. Try to be realistic.
- Applicable, such as buying a house. Something real and not virtual like being rich.
- Measurable. What percentage of annual return do you want to achieve? You have to be precise.
- Duration. Write how long you want to reach the goal.
Timetables
Immediately write down how much time you can devote to trading each day, when and how you will use this time.
Again this is highly subjective and depends on personal commitments as well as the intention to make trading a part-time or full-time activity.
To this, we must also add the availability of the brokers.
The best Forex brokers “never close”, allowing you to place orders at any time. Risk/reward ratio
With the basic conditions defined, it’s time to do some calculations.
The risk/reward ratio defines the amount of loss and profit expectation of any trade. This data influences the instruments that you are going to trade and the strategy to use.
For example, the ideal risk/return ratio is 1:3. Thus, with a capital of $1000 we can trade with $10 without fear of losing it, against a potential gain of $30.
The risk/reward ratio also provides valuable indications for correctly setting the Money Management tools, i.e. Stop Loss and Take Profit.
Trading strategy
Trading strategy is important and you have to choose the right one for you. For example, if you can dedicate 1 hour a day to trading, you cannot do Scalping or Day Trading, which need more time to prepare and execute the necessary strategies.
The main trading strategies are:
- Position trading. A long-term strategy, which focuses on open positions for weeks, months or even years.
- Swing trading. A strategy that follows market swings and usually manages daily or weekly positions.
- Day trading. As you might guess, this style involves opening and closing positions on the same day.
- Scalping. A very rapid style, not suitable for everyone, which is based on positions that last a few seconds or a few minutes at the most.
From these strategies, you can pick the specific one you want to use in Forex trading. Also, you’ll have to decide which indicators to use, the settings, and the signals that determine the entry and exit from the market, even when the objective has not been reached.
Practice on a Demo account
Before you try your hand at real trading you have to practice a lot of with a demo account. These tests are used to optimize the strategy and various details of the trading plan. You don’t have to be in a hurry and dedicate the right time to practice.
This will allow you to understand how far your learning has come, if the chosen market is right for you, how effective the strategy is, where are the mistakes, how to correct them and much more, without risking real money.
Trader Psychology
Self-control and the management of anxiety and emotions make the difference between a beginner and a professional trader more than the strategy used.
You have to learn to manage emotions, even if they are very minor. You have to learn to understand and control them, because they are the ones that often lead to making the most serious mistakes.
The psychology of the trader is something that is formed over time when you make losses. Don’t let yourself be caught up in the hunger to gain or the fear of losing but always respect the set strategy.
For this reason, it is important to identify key price levels, which can be easily identified thanks to the Trading Signals we have already talked about.
Forex trading plan examples
Whether you’re starting with a small budget or a larger one, here are some practical examples of simple forex trading plans to guide you on your trading adventure:
$1000 Forex trading plan
Imagine you have $1000 to start your forex journey. It’s a decent amount to begin with. Here’s a simplified trading plan:
- Risk management: Only risk 1-2% of your capital on a single trade. With $1000, that’s $10 to $20 per trade.
- Currency pairs: Focus on a few major currency pairs like EUR/USD or GBP/USD to begin with. They tend to be less volatile.
- Timeframe: Start with a daily or 4-hour chart. This gives you a broader view of the market and reduces the stress of constant monitoring.
- Strategy: Choose a simple strategy, like moving average crossovers or support and resistance levels. Stick to it and practice on a demo account until you’re consistently profitable.
- Goal: Aim for a monthly goal of 5-10% profit. This might seem small, but it’s a realistic and sustainable target.
$100 Forex trading plan
If you’re just dipping your toes into forex trading with $100, here’s a basic plan:
- Risk management: Since you have a smaller capital, be extremely cautious. Risk no more than 1% per trade, which means $1 per trade.
- Currency pairs: Stick with major pairs like EUR/USD or USD/JPY. They have lower spreads and are less volatile.
- Timeframe: Start with a daily chart. It’s less overwhelming for beginners.
- Strategy: Keep it simple. Try a basic strategy like support and resistance or trend following. Practice on a demo account until you gain confidence.
- Goal: Initially, aim to learn and not lose money. Your goal is experience, not quick profits.
$50 Forex trading plan
Even with $50, you can venture into forex. Here’s a plan tailored to a small budget:
- Risk management: With only $50, risking 1% per trade would be just $0.50. This is incredibly conservative, but it’s necessary to protect your capital.
- Currency pairs: Stick to major pairs for lower spreads and liquidity.
- Timeframe: Start with a daily or 4-hour chart. It allows you to trade with the trend and not get caught in short-term noise.
- Strategy: Choose a simple strategy and practice on a demo account extensively. Don’t rush into live trading.
- Goal: Initially, aim to preserve your $50 while learning. As you gain experience, consider adding more funds to your account.
$10 Forex trading plan
Now, what if you’ve only got $10? Believe it or not, you can still trade forex with this amount. But, you need to be super cautious. Here’s a minimalist plan:
- Risk management: With $10, risking 1% means you’re only risking $0.10 per trade. This might limit your options, but it’s essential to protect your capital.
- Currency pairs: Stick to major pairs for the best spreads and liquidity.
- Timeframe: Use a daily or 4-hour chart. It reduces stress and allows for more thoughtful decision-making.
- Strategy: Keep it super simple. Focus on a single strategy, like moving average crossovers or basic support and resistance.
- Goal: Initially, aim to learn and minimize losses. With a small account like this, it’s all about learning and building your skills. Don’t focus on making money but on gaining experience.
Conclusion
As you have seen a Forex trading plan is your true ally, and is part of what makes a Forex trader successful. Having an FX trading plan protects you from making rash decisions in any eventuality. By creating careful plans, you can find ways to be more consistent in your overall approach.