1. Introduction to Forex Trading Plans

One of the many hidden gems within the trading community is what I want to introduce to you today. Think of it as a set of rules. You need these rules, a set of guidelines, and a butler to pick out the right fruits for you while you concentrate on the other important aspects of your trading. With this plan, you can forget about the countless systems and indicators being sold on the market that aim to make you a millionaire overnight. The problem with trading is not the lack of advertised tools; it is a lack of understanding of what actually determines your long-term success in trading. Knowing this simple equation and living by it is the key to prosperity and, thus, your long-term success in trading.

The foreign exchange market is large, complex, and extremely liquid. It has the potential to generate astronomical profits or catastrophic losses. At a minimum, those involved need to have a clear understanding of the forces at work and a framework to use for response. Some people use a technical or fundamental approach to their forex trading, while others use a variety of both. Many traders use a strategy that is neither technical nor fundamental; it is like gambling. Such traders usually say that the technical and fundamental beast eats their performance, but they never (or rarely) blow up their accounts. This is because they use risk management techniques that limit their likelihood of blowing up their trading accounts.

2.Key Components of a Forex Trading Plan

A good trading plan will thoroughly detail every decision that a trader must make throughout the trading process. It should include rules and analysis for trade initiation, trade monitoring, trade management, and trade exit. Since investing plans should balance money management, market analysis, position information, and trade execution, each chapter covers these topics with the common goal of reducing the likelihood of trading losses. The plan should be designed to be easily accessible, the trading rules should be prevented from being relaxed, and trade ideas should be tracked through execution and exit. This detailed documentation will describe the appropriate risk-to-reward ratio, drawdown limits, margin requirements, and the maximum acceptable loss of capital to achieve better long-term performance. By keeping a trade journal or journaling trade information, it is possible to track progress and assess the impact of decision-making over time.

It is important to develop a forex trading plan designed for long-term success. When properly researched and executed, a trading plan will offer traders a framework for entering and exiting trades and assigning appropriate amounts of capital to each trade. This can help protect a trading account from large, adverse market-wide price movements, overextended losing streaks, and the costs associated with high levels of trading activity. It is important to note that the purpose of the trading plan is to increase the likelihood of overall profitability. If the plan is adhered to, then the trader will be able to adjust the plan as the market moves to channel price developments.

2.1.   Setting Clear Goals and Objectives

Objectives must be set for the closing of transactions. If you love too much money, you will leave your profit on the buying transactions. Not even between six months or one year, the investment would bring much money, due also to the power of compound interest, in which the interests will be added to the capital and, from that moment on, the interests will belong to the investors themselves, and their objective is constantly increasing. After having noticed that a great number of buy transactions undertaken between the maximum and the minimum of the previous day are totally fulfilled on the same day, we naturally tried to place some buy transactions on that same day at those same levels, due to the fact that this increase continued. However, I did not notice that after six months, we were banking this way, with very little risk, a gain, and a profit easily to become accustomed to.

In the forex market, you can set up objectives between 500 pips and 1000 pips per month. However, keep in mind that a positive performance of 5% per month equals 79% profit. You can also set out objectives such as 1% per day, 5% per week, or 10% per month. These objectives are reasonable, and you will be able to achieve them regularly. Keep in mind the high risks in the market. If the investor has 5 ruined days during the month and 20 good days, the income at the end of the month will most probably be lower than expected. As the objectives set for the buy transactions are satisfied, they must be replaced, and others are then taken.

2.2.   Risk Management Strategies

The same applies to second-rate or dishonest brokers. These people will take your money and run off with it. The temptation to put your cash at risk is enormous, but the possibility remains that you are caught by false promises, which can include everything from scams to simply poor execution of orders. We emphasize this risk now, as it is extremely important. The first step should be to focus on recognizing the risk in forex market trading. A lack of sobriety in the realization of what is at stake is the prelude to a terrible end. Never open your position in the Forex market until you have assessed the feasibility and viability of your Forex trading system and the risk you are about to take. A trading system without risk management is like a bank without money! It doesn’t make sense, does it?

No matter what strategy you adopt, it is important to clearly assess the risks involved and maximize the potential benefits. To trade successfully, you need to accomplish both of these at once. You cannot focus only on one side or the other; you need to develop a sense of balance. If you cannot do this, then you will never become a successful trader. This could not be more important. People who jump into the FX market with the idea that it is possible to double their $5,000 account in a month or two are likely to be the ones who get stung and lose all their cash. If a system is too good to be true, then it probably is. If you are foolish enough to think that an advertisement is correct and put your money at risk, then it’s not long before sad experience teaches you otherwise. If you don’t want to make mistakes like this, then you had better read this section carefully.

2.3.Trading Style and Timeframes

Once you know what your trading style is going to be, whether you’re a scalper, day trader, swing trader, or position trader, each of these takes on a different trading plan that can help give some good guidelines to work towards.

Position Trading: When trading in currency changes, this way of trading looks at the long term and usually ends up holding trades for a number of days, weeks, or perhaps even months.

Swing Trading: This is for more experienced traders, where the market is re-assessed with a bigger picture over days, weeks, or months.

Day trading is pretty much the same as scalping, although, in this case, you need to either enter or exit your trade the same day.

Scalping: This is forex trading that’s taken place in a much smaller timeframe where you can accept a few pips as profit, and at the same time, you’re only trying to go for small movements throughout the market. The market exposure is less, and you’re not sitting all day long waiting for profits.

Before you sit down to make up a trading plan, it’s at this point that you need to know what your forex trading style is, and these are the styles you have to choose from.

2.4.Entry and Exit Rules

Market momentum is very important here, and we will assume that you are trading with the momentum. Following the basic concept of entry and exit rules for momentum, one should trade in the direction of the momentum with trend-following behavior. An exit can be handled in a few ways: you will need to determine whether you will be using tight stops, two separate levels as currently recommended, or one level, but only adjust it in the direction of your trade. Your exit could also be based on simple momentum rules, such as the larger time frame weakening.

2.4.2. Target You need to incorporate this into your trading plan when you are going to finally take a profit. To do this, you need to be disciplined and professional. Once you have reached your predetermined price, you should take the profit whenever the opportunity arises. Do not get emotional about leaving a trade too early. It is always best to realize some profit rather than no profit at all. Think about aiming to capture half or a third of the daily directional movement and then trying to capture the remainder on a reposition or a pullback.

Remember, you are trying to make a profit, and sometimes you may want to do this in several steps or by re-aligning your stop. It may, therefore, make sense to move the stop loss up, but never down, as a rule.

Example: You have $5,000 to trade with. You should risk $100 on any open position(s). If 1 pound or pip fluctuation equals $10, you should not risk more than 10 pips. Now all you have to do is figure out a logical place to put your stop. This could be a major top, trendline, or support or resistance. Decide which one of these is most logical for the trade.

As a rule, you should only risk 2 percent of your available trading capital. If you lose on all your open positions, the loss should constitute no more than 1 percent of your closed equity. If that happens, you should not be too ashamed of yourself, but if it’s much more than that, then you need to take a look at your trading strategy.

One of the most important aspects of a stop-loss level is that it must be determined when you are not in a trade. There is nothing worse than suddenly being faced with a rapid decline in a market price and then having to work out where to place your stop. Your stop might not be honored, and the price might not reach that low. If this happens to you a few times without a stop, you might find suddenly that you have very little cash left to trade with. The consequences can be financially disastrous, to say the least.

2.4.1. Stop Loss A stop-loss order is a price level at which your open position(s) will be wiped out. These levels are very helpful because the market changes fast and not always to our advantage.

No business in the world would consider trading, buying, and selling its products without a well-defined plan. For some reason, many individuals seem to think they can operate in the Forex markets without a plan. Once you realize that fast trading means having to incorporate more than just your computer and a trading platform, you can start rediscovering the fun in FX trading.

In recent years, currency trading has grown rapidly, mainly because of the internet. Nevertheless, Forex still has an image problem. It is an exciting, fast game, but most people treat it as an investment. That is fine as long as the markets make money for you, but when prices start declining, the fun and excitement of trading seem to evaporate very quickly.

3.Creating a Trading Routine

Routines also channel time better, eliminating wasted hours each day waiting for something exciting to happen. They assist in the monitoring of the effectiveness of your efforts and the adeptness of your performance, introducing something as mundane as accountability into the enterprise. With routines, the trader emerges as a master of his own fate rather than a victim of daily market randomness. Routines contribute to self-discipline. The trader slowly recognizes the best time to trade, the best time to stand aside, and the market reality. Experience with routines divorces the trader from thinking that he can “forge the market to marble.” A routine channel channels energy. Trading is an intense, highly charged emotional endeavor. Several traders feel mentally exhausted after a day of trading. Volumeive traders who don’t take proper meals or rest breaks or don’t condition themselves properly cease to function optimally. Limiting the day’s activities is similar to the ancient exotic philosophy of Yin and Yang, an intricate balance acquired from the difference between active and restiveness—necessary in all things.

A trading routine often delineates the difference between an amateur trader and a professional one. Rookie traders take their trades whenever they see one, ignoring time and other life restraints. Successful businessmen invest their time only after weighing up the potential return and degree of risk against other life opportunities. At 5:30 in the afternoon and 5:15 p.m. in the morning, when market opportunities reach your doorstep, they push the priority button. The more optimal a routine is from the trader’s perspective, the greater the odds he has for success. The trader has to design his trading routine to fit his lifestyle—time trades when most profitable and minimize exposure at times when not in favorable trading environments. The degree to which the trader separates trade time from downtime or other life responsibilities contributes to the establishment of his identity as a trader, the scope of his new business, and his personal satisfaction with success.

3.1.Daily Pre-Trading Checklist

The daily approach of scanning the currency markets can quickly tell what your focus is on, whether it is the further refinement of the broad risk theme, specific news items such as commodities, or additional wiring in other items of interest. Determine how to incorporate the additional research required before going through the same steps each day. It has been noted, especially on a non-farm payroll morning, that when a plan is set up and a pre-market routine is executed, the day can feel and proceed a lot more structured and organized. The pre-market plan is the map of the day.

One of the major benefits of setting up a daily pre-trading checklist is that it does not require any major revamping all the time. Typically, changes will likely be made periodically and can be incorporated when regularly diving into your trading plan as part of the business plan review. The majority of your basic morning tasks are likely similar each day, and there is a set class of traders and currency managers that spend time first thing in the morning going over anything that may have developed. Before getting to the ‘need-to-do’ list, additional areas of research may also be required.

3.2.Reviewing and Analyzing Trades

If we have a large loss, the situation is somewhat different. Such situations are possible because we are not disciplined enough. These are harder but ultimately more valuable mistakes to learn from because they have a longer-lasting and beneficial impact on our trading within the forex market. We may have ignored one of our golden rules. Write down how you were feeling at the time of the trade and what you were thinking. Was it greed, fear, anger, overconfidence, complacency, etc.? Think about your fears concerning the trade. What were they? Did they turn out right, and after all, avoid trading because you were fearing a result?

We may be kicking ourselves, but we should carefully review any closed trade, whether we have a profit or loss, to see if we can gain experience for the future. If we have a profit, we should identify the reasons for the good result and consider replicating these steps. If we have a small loss, we should also identify the reasons for the loss. The aim is to learn enough to know if a future opportunity is something we should also be taking or rejecting.

4.Backtesting and Optimization

Backtesting and optimization have great potential for misuse due to their ability to generate high hypothetical returns. Traders must take care not to overfit data when testing their method. Overfitting is the use of unnecessary rule sets that fit past prices well but do so poorly in the future. The best test of overfitting is one of simplicity. The simpler a trading plan, the less likely it is to suffer from the pitfalls of overfitting. So what do we do when faced with a trading plan that we feel is overfitted? The answer is to take some things out. Tradable models are usually more sustainable when they use continuous contracts, have small parameter sets, and have robust results for testing periods. However, taking out rules may not always improve the market-beating nature of a trading plan. Many methods rely on specific set parameter values after all; tests generally reveal that the more stable estimates may not be as useful as the simpler rules with the optimal parameter values.

Before the updated plan can be used in live markets, you need to make sure it will be functional under normal trading conditions. This involves testing to ensure the plan will perform adequately in the intended market. Traders perform testing by asking for a plan to optimize by changing a single parameter while the rest of the inputs are kept constant. A common example is adjusting the value of the short moving average (SMA) in a moving average crossover system. Traders then test over various periods to determine whether these times display similar characteristics. If a plan is able to optimize successfully and the market analysis suggests that the desired behavior exists in a variety of market conditions, traders can assume that the selected parameter is robust and the model should perform adequately in the future.

5.Monitoring and Adapting the Trading Plan

During our mentorship webinar program, most traders were surprised that over 65% of the slides with stock and currency charts, which were presented by other pupils, were not from previous days. Of those, nearly all of them were pulled from the current trading session that took place during the training session. What if a trader is unable to monitor their positions during the trading session?

Even the best plans can go astray. It is during these times that your experience and education will give you the tools that are necessary to adapt to an ever-changing market environment. In the same example where a 20% drawdown eliminates 100% of trading capital, the same holds true for a boutique trader with a 15-minute trading timeframe who should refrain from trading on a day where key data releases are being made public. If the trader holds a longer-term perspective, price action and a hefty stop loss might be all that are necessary to ride out price storms.

One common reason for traders to create a blueprint for their trading journey is that it can create efficiency. However, outer factors can change at the most inopportune times, and a change of tactics during the battle may be the very series of moves that saves your portfolio. Once a plan is created and funded, you are now a proactive money manager. You must now be prepared to monitor every bit of data, including news and economic releases, price action, money flow, and account balance. For many traders, most of the hard work is done before trading; however, most of the time needed is spent monitoring trades and real-time data.