What is a Trading Plan?
A trading plan is a set of rules you have created as a Forex trader to help you stay on track and disciplined while being profitable in trading Forex. This trading plan is customized based on the trader’s personality, expectations, risk management rules and trading system.
Some of the key benefits of having a trading plan – a strictly followed one – are: it will help you prevent doing irrational actions and reduces the number of your bad trades.
How Do You Create a Trading Plan?
Your trading plan should answer the following:
I. Motivation for Trading
Motivation is your goal or the driving force in which you decided to trade Forex. Why do you want to become a successful trader?
Your goal should be SMART. Be as specific as possible.
II. Risk Capital
How much money are you willing to risk?
The amount of money you should set aside for Forex trading is the amount of money you are willing to lose. This means you should trade with your excess money. Don’t trade using a live account if you are having difficulty in making ends meet. Instead, trade using a demo account until you are ready and have enough risk capital.
III. Time Commitment
How much time are you willing to spend in trading Forex? Do you want to trade it daily? Weekly? Monthly or Yearly?
You can be one of the following traders:
- Day Trader – intraday (within one day) trades
- Swing Trader – hold overnight positions
- Trend Trader – hold positions weeks to months at a time
Remember that amount you are willing to spend should be realistic. Consider if you want to be a part-time or full-time Forex trader, and the time frame you want to use. The shorter the time frame you use, the longer time you need to spend in front of your computer. Similarly, the higher the time frame, the lesser the time you need to spend.
IV. Expected Returns
What is your bottom line goal? Do want to have a return of 6 percent per week? Or more? Consider the possible drawdowns to your account.
Also, do you take profits out monthly, quarterly or yearly? This can affect your running capital that you can use in trading.
V. Daily Pre-Trading Routine
What are the things you do before entering a trade? Your routine should include the following:
- Review any open positions and make necessary adjustments to it;
- Review your previous trades;
- Check for upcoming news releases that may affect your trades; and
- Prepare for any potential trades.
VI. Trading System
These are set of rules you have created on when to enter or exit a trade, the risk to reward ratio and time frame based on your testing of one or more combination of technical indicators.