What Is A Forex Trading Plan? Why Should You Have One?

Whenever you read any book or article about the topic of forex trading you will surely read about the relevance of having a sound trading plan. The success rate of a new trader greatly depends on their trading plan along with their knowledge and skill level. Trading without a plan will be like constructing a building without a blueprint. Without a well-defined plan, you will be confused about everything and anything important in the trading process. You won’t be able to find the right occasions and you’ll make terrible trading decisions leading to losses.

If you are a beginner, you might be confounded about what an exchanging plan is and why you want to make one preceding wandering into forex exchanging. In this blog, you will get to peruse every one of the insights regarding an exchanging plan alongside the means for making one for yourself.

Forex Trading Plan – In Detail

The first thing you need to do is find out the reason behind creating a forex trading plan. To do so, you must know the basics of forex trading. In the forex market, the movement in a currency pair depends upon the market movement, whether it is in an uptrend, downtrend or sideways. This may be carried out via technical analysis, which involves analysing the patterns forming on the price chart or fundamental analysis where a trader looks at economic indicators and news events that cause trade rate fluctuations. To perform an analysis, you will need to be a part of a trading platform Like MT4 or MT5.

You can check out MT5 as it offers a lot of advanced tools and additional indicators for technical analysis which makes it appropriate for people who want to carry out in-depth analysis or trade multiple assets. You cannot start trading without creating a trading account with a forex broker and for placing trades, you’ll need to use the platform that they offer for trading. On this platform, you will place buy or sell orders primarily based on the type of movement you expect in a currency pair. A buy order means that you think the price will rise while a sell order is placed when the price is most likely to drop. 

But which currency pairs are you going to trade? What time frames are you going to use for analysis? and how are you going to find ideal trade setups based on your trading goals and risk tolerance. All of these details need to be stated on your trading plan before you start trading for real. Otherwise, you will get overwhelmed and confused while trying to find trading opportunities. Many traders say that they have a mental plan and don’t need to do calculations or backtesting for their strategy but this is not the right approach for anyone. 

Even those who have a solid trading plan fail to attain success at times and expecting to become profitable without a proper plan is like gambling. Trading needs to be analytic and strategic with clear goals and objectives. The methodology that you are adopting to achieve your targets should be feasible and compatible with your risk appetite. Because no strategy guarantees a 100% win rate and you will have to lose something in the process of gaining. How you plan to manage the risk should also be decided while devising your trading plan and how well it works will decide the results that you get on your trading account.    

How To Create a Trading Plan?

Making an exchange plan is something beyond recording the means that you will follow as a broker. It ought to be extremely organized and nitty gritty and yet, it ought to be exceptionally straightforward and complete. Because a complex trading plan will only make the trading process harder whereas keeping things simple allows you to trade with ease. The process of creating a trading plan needs to be taken seriously and I will list down the key steps for devising a trading plan that fully aligns with your goals. 

• Defining your goals 

The purpose of a trading plan is to guide you toward your goals with a sense of direction for the trading journey. Hence step one is defining the goals that you want to attain as a forex trader. Are you making plans to be a full-time trader or just making plans to alternate forex to make some more bucks? The profit targets need to additionally be decided as part of your purpose but they have to be practical and doable. You should also set the duration for achieving these goals and make them as detailed as possible.  

• Deciding your trading style  

Deciding on a trading style can be harder than you think as you are not sure about which style will suit your trading personality. Will it be better to start off as a scalper or day trading would be more ideal? Is it better to focus on longer time frames with swing trading or becoming a position trader will fit more with your schedule? Each of these trading styles gives different results and you may want to try different styles on a demo account first. Because you get to trade in conditions that are similar to real market conditions, but with virtual funds, you are going to get an opportunity to experiment in a risk-free environment and make a wise choice based on the demo trading experience. 

• Choosing a method for analysis and strategy 

Once you have decided on the trading style you need to choose the method for analysis and also select a strategy for trading. It can be a strategy like trend trading to make profits from uptrends and downtrends or range trading where you make profits from small sideway movements during consolidation. All these strategies are based on technical analysis using price charts. It can also be breakout trading where you look for price breakouts for opening a position or strategies like news trading that are based on fundamental analysis. 

Choosing a strategy will be a lot easier when you understand how each of these strategies works and outline the steps for executing them. You will have to be clear about the entry and exit points along with position sizing. All these aspects are important for making profits in a trade. Even the amount of trading capital that you are going to use for trading and the amount of risk you are comfortable with needs to be considered for devising a solid strategy. Because the forex market can move in any direction you must be prepared to encounter losses once in a while. 

The best time to enter the market and technique to find a favourable entry price, all such things need to be a part of your strategy. Besides technical and fundamental analysis, you can also rely on sentiment analysis for making trading decisions. Sentiment analysis considers market psychology, based on the direction bias of the majority of traders. Active traders will be opening buy or sell positions based on their analysis and if there are more buyers in the market, it indicates a bullish sentiment. 

Similarly, an increase in the number of sellers suggests bearish sentiment. Sentiment analysis can be useful for finding the potential reversal points by also considering the overbought and oversold levels. In this planning phase, you should also select the technical indicators that can be added to the charts to get more information. Simple yet reliable indicators like Pivot points, Moving Averages and RSI can be used to find favourable price levels for your strategy.

• Backtesting and demo trading 

Once you have decided on the final strategy for trading, you need to utilise the backtesting feature on the trading platform to test your strategy with historical market data. It helps you to check how your strategy will work without any risk. Demo accounts can also be used for testing the strategy but there you will be placing trades in real-time trading conditions while backtesting allows you to check the trading results for a long period of time by taking the market data for several years. 

On trading platforms, you can also evaluate the results and make changes to optimise the performance of your strategy. Because you may not be able to get everything right in the first attempt. Hence, you need to consider the strengths and weaknesses of your strategy to make it better before risking real money. Otherwise, you will end up making costly mistakes on a live account and that will affect your confidence as a trader. 

• Striving for Improvement and being flexible 

Once you have fine-tuned your strategy, you can start trading on a live account but you should follow a cautious approach and keep track of your progress with a trading journal. It is normal to encounter losses and you just need to stay disciplined and stick to your risk management plan. You should be conducting self-assessments from time to time as it helps in improving your trading performance by identifying mistakes in time. Another thing to do while following your strategy is to remain flexible as the market can undergo changes and you may have to revise your strategy to adapt to the situation. 

Wrapping Up

Finding the right trading approach and creating a sound trading plan is just the first step towards success. The outcomes you get ultimately rely on lots of factors and many of those are beyond your control. However, the ones who have knowledge and capabilities can cope with all the challenges and proceed towards their trading goals.