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2023-04-27 • Updated

How to Build a Winning Forex Trading Plan?

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Many traders start trading Forex in hopes of making quick and effortless profit. It’s true that the Forex market presents many opportunities for traders to earn money off of price movements. However, it’s hard to make consistent income without careful planning and a good strategy because impulsive decisions and lack of self-restraint can turn any trade into a losing one.

In this article you’ll find out what a trading plan is, why it is important to make one before you start trading, and how to build a winning trading plan that can help you largely increase your chances of success in Forex trading.

What is a trading plan?

To put it simply, a Forex trading plan is a set of rules and instructions that traders set for themselves in order to achieve profitable trades. An average trading plan outlines the most important things a trader should consider before opening a new position: timing, the size of a trade, risk management, entry and exit points. It can also include more general rules, like what kind of trading style traders prefer, what assets they want to focus on, their profit targets for a week or a month, etc.

It’s important to remember that your trading plan should reflect your own needs and plans. Taking someone else’s plan and applying it in your trading would be counterproductive as every individual trader has different means, resources and goals. Developing a new trading plan from scratch can help you evaluate your financial capabilities and understand what pace is more comfortable for your level of proficiency.

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Why is a trading plan important?

Over the past couple of decades, the Forex market has attracted a lot of new traders who don’t have a lot of experience in working with financial markets. Because of this and the general lack of limitations on the market, it’s very easy for both beginners and seasoned traders to lose themselves in the constantly changing prices.

Without a cohesive plan and understanding of what your goals are, you run the risk of missing the best opportunity to open or close a trade. A trading plan, however, brings a much needed structure to trading, helps you better understand your limits and goals and ensure profitable Forex trading. It’s also a good way to keep track of winning and losing strategies, making it easier for you to learn from your mistakes and polish your skills.

10 steps to build a successful trading plan

1. Prepare yourself mentally

Forex traders have to work in a very demanding fast-paced environment where each second can bring or take away new opportunities. In order to keep up with the constantly changing prices and be able to make quick and rational decisions, you need to be exclusively focused on trading.

However, if you feel that you haven’t had enough sleep or have trouble staying focused on one task without getting distracted, trading in this state might do more harm than good. When you can’t concentrate, you run the risk of missing trading opportunities, which can even result in financial losses.

It’s also crucial to keep your emotions in check when you’re trading. Getting attached to open positions even when all signs are telling you to let go, making irrational decisions out of anger or desperation is detrimental not only to your mental state, but also to the state of your wallet.

Many traders practice mindfulness and meditation in order to get in the trading mindset and get rid of distractions. Some even use market mantras and repeat them before starting trading. Regardless of what helps you stay focused, it’s important to be able to recognize when your concentration slips and get back to trading when you’re feeling more up to it. Knowing about trading psychology can help you recognize harmful patterns of thinking and swiftly take action to keep your funds safe from rash actions.

2. Look for opportunities

On the one hand, trading volatile and unpredictable markets can be really difficult and risky if you have no experience in dealing with unexpected price changes. On the other hand, if the market lacks any movement, it’s hard to find good trading opportunities that can bring you tangible profit. That’s why you need to be aware of what is currently going on in the world of finance because it can potentially influence the market and create or take away trading opportunities.

To do this, you should keep track of the events that might affect the performance of the asset you’re interested in. You may also want to check the FBS economic calendar for economic or earnings data releases as they also greatly affect the market. Being able to learn that a particular event has occurred before the general public finds out about it can help you quickly analyze probabilities and prepare for potential market changes and plan your trades accordingly.

3. Use technical analysis

If you’ve completed any beginners’ course, you already know that technical analysis is an important part of trading. Technical analysis tools use statistical data gathered from the past trading activity and prices to predict any future price movements. Traders use technical analysis to examine the levels of the market supply and demand, which can in turn affect the changes in price and volume of a traded asset as well as cause some market volatility.

Nowadays, trading platforms offer a wide range of technical analysis tools: chart pattern recognition programs, oscillators, volume, momentum, and moving averages indicators, etc. Using these tools to detect distinct chart patterns, draw support and resistance lines on the chart, identify the direction of the trend can help you better plan your next move and find entry and exit points with more precision.

4. Choose your trading style

Before diving in and opening your first trades, you should decide what trading style you would like to commit to, at least temporarily. The style you choose depends on the amount of time and money you can invest in trading. Generally, most traders stick to day, swing or position trading.

  • Day trading involves buying and selling assets within a single day. Day traders generally hold their positions open for a few hours, but sometimes even as little as 10–20 minutes. Day traders strive to profit from rapid price fluctuations and can hold up to 30 or sometimes more open positions at once.
  • Swing traders aim to capitalize on price swings. Swing trading is considered a medium-term trading style as swing traders can hold their positions open for several days at a time.
  • Position trading is a long-term trading style that involves holding positions for several months or years. Position traders try to predict the underlying market trend and profit from long-term price movements. Position trading also requires a larger capital to overcome potential troughs and swings.

As you see, each trading style requires different amounts of attention from traders. Day traders need to constantly monitor the charts to catch an opportunity for more profit while position traders don’t need to check their positions every day.

It’s also possible to adjust your trading style depending on the current market conditions. For example, if the market is trending, it might be better to stick to swing trading and catch a large price movement. But if the market moves within a limited range, day trading would yield better results and allow you to capitalize on small price changes.

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5. Select your trade’s capital

Putting your whole trading capital into one position can bring you more money, but can also cost you your whole trading account. That’s why pooling only a portion of your trading capital into one trade is important. This way you won’t lose all your money if something goes wrong.

The amount of capital you use on one trade depends on your risk tolerance and trading style. If you’re a position trader and hope to get high returns after a long period of time, then choosing a larger trade capital might yield better results. On the other hand, spending a large sum of money on an hour-long trade during a volatile market is much riskier, so it’s better to redistribute this amount across several trades.

In general, the amount of risk allocated to one trade should range somewhere around 1–5% of your trading capital. This way you won’t lose your whole account if the trade ends up unsuccessful. However, if you encounter a series of losses, it’s better to take a break and return to trading another day as your emotions can sabotage your next trades.

6. Determine entry and exit levels

The next important step is finding the best opportunities to enter and exit a trade. Contrary to popular belief, it’s actually more important to determine exits before entering trades. So many traders put all their effort into opening positions without learning first if there are any opportunities to close them. That’s why you should look for exit points before taking a buy signal.

If you see a potential opening, think where you can place a profit target. Some traders plan their exit when the price hits a round number (like $50) or increases by a round number percent (like 15%). But you should always keep your ambitions within rational limits. Setting exit points too high might endanger your position and prevent you from taking lower but more achievable profit.

Setting entry rules is much easier. You need to look for a signal and check if there’s a minimum profit target within available range. If the conditions you set for the trade are met, you can open a position. However, try not to overcomplicate your entry rules. It will be hard to find opportunities if you have a long list of conditions that must be met before entering a trade. It’s possible to set some non-negotiable entry rules that don’t limit your trading opportunities, so choose your entry signals wisely.

7. Manage your risk

Once you find entry and exit points, it’s important to protect yourself against unexpected price movements. There are many risk management tools available to traders, but the most basic thing you can do is place stop orders. These orders get executed once the price reaches a certain level and prevent it from moving past a certain point. This allows you to put a cap on your potential losses. You can also use take-profit or limit orders while planning your exits to automatically close a position without having to do it manually.

Another risk management strategy you should use is diversification. If you’re focused on Forex trading, it’s best to open positions for multiple currency pairs. This way, if one market experiences a sudden drop, other markets that experience a stronger move can help compensate for your losses.

8. Keep records of your trades

Keeping records of your trades is a very useful habit, and even professional traders with years or decades worth of experience do this. You need to write down every important detail about your trades: entry and exit points, timing, support and resistance levels, daily market open and close. This information can help you gain insight into what contributed to your successful or unsuccessful trades. Understanding all the factors and circumstances around your trades is useful to improve both your trading strategy and your skills.

9. Analyze your profit and losses

It’s important to know how much money you earned or lost during trades. It’s true that getting stuck on the monetary aspect of trading can be harmful to your future trades, but in the end, trading is business, and money always matters when it comes to business success. So analyzing your net profit is a good way to understand whether your current trading plan is working or if you need to adjust it to meet your trading goals.

10. Don’t stop improving

Unfortunately, no Forex trading plan is a one-size-fits-all kind of deal. Sometimes your first plan doesn’t work out the way you thought it would. Other times, it works at first, but then stops bringing the same results. It’s also highly plausible that your trading needs and goals can change over time, so you’ll have to develop a new trading plan with them in mind. Trading requires constant growth and improvement. You can use your past successful trading plans as the foundation for the new ones, but you should always strive to find new solutions to make them even better.

Conclusion

The world of Forex trading moves fast, so it’s easy to get lost in the constantly changing prices and your own emotions. The best way to ensure successful trading is compiling a trading plan that keeps track of everything you as a trader need to pay attention to before opening a new trade. A good trading plan can help you navigate the fast-paced environment of the Forex market, keep you focused and rational, and improve your trading skills much faster than if you were to trade without it.

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