So you have probably heard of forex trading. You looked a bit into it and found it stands for foreign exchange, and that many have made a lot of money out of it. Naturally, you would want to take a shot at it and see where that takes you. Will it leave you rich, or will it drain your account? Either way, you will need a good trading plan before you proceed. That does not guarantee a win, but having a plan is always your best way towards success in the forex market.
What is a trading plan, you ask? Well, what we call a trading plan is basically a systematized approach to trading, taking into account various factors such as the current market situation and your own trading preferences. Putting it into more simple terms, it is how you execute your trades depending on the situation and other rules that conform to your preferred trading strategy and goals.
Benefits of Having a Trading Plan
Perhaps the only disadvantage to having a trading plan is that you have to think thoroughly to come up with one. Having a comprehensive trading plan, however, gives you the following advantages:
- Trading is made easier. A trading plan basically provides you with set parameters based on various factors, and these makes it easier for you to decide how to proceed with your trade should a certain situation arise.
- Your trading is more disciplined. Since you are following a plan that puts limits on your trades and losses and provides you with clear guidance on what to do depending on the situation, you are unlikely to fall into making emotional or irrational trading decisions.
- You can make decisions in a more objective manner. The parameters set by your trading plan also provides you with objective guidance on when you should take your profits or cut your losses. This practically prevents you from blindly trading and takes emotion-based decision-making out of the equation.
- It gives you more opportunities for learning. A trading plan will always require you to make records. You can look back into these records to learn what works and what part of your trading strategy should you improve upon.
How to Create Your Own Trading Plan?
It is never too late to come up with a trading plan so long as you still have the capability to make investments. Here are the basic steps that you will need to follow to come up with a comprehensive trading plan:
- Determine your motivation. Knowing why you want to trade in the first place is crucial to learning how much time you want to commit to trading and how you should plan your trades.
- Know the time that you can put into trading. Based on your current personal situation or your preference, you need to know when and how much time daily should you allot to trading.
- Set your goals. Your goals should be SMART — that is, you will need to have specific numbers, measurable success, attainable with your current capabilities, relevant to trading, and time-bound.
- Decide on a reasonable risk-reward ratio. Also known as RRR, this is the ratio of your losses compared to your rewards, and determining such involves knowing how much risk you can afford to take. Many traders recommend an RRR of 1:3.
- Set a trading capital. This also depends on the risks that you are willing to take, but be sure to set nothing more than a part of your budget that you can afford to lose.
- Know your market. Learning your market is crucial to trading as it gives you a rough idea on how it moves and what decisions should you make given a certain movement.
- Back your trading plan with a diary. A trading diary serves as your documentation, and it is handy if you are looking to improve your trading strategy.
A trading plan should serve as the backbone of your trading strategy. As such, be sure to take your time to come up with a comprehensive plan that covers most, if not all, market situations.