Building a Forex Trade Plan

There are two vital components which are needed to become a successful Forex trader: developing a technically-sound trading plan and executing it on a daily basis. It is also crucial to keep in mind that a trading plan that brings one person success, may not necessarily be as effective or successful for someone else. The reason for this lies in the fact that many of us differ in styles of thinking, risk tolerance levels, and market experience. It is advised that you develop your own personalized trading plan which you are comfortable and which you can then modify as you gain experience and confidence.

A Trading Plan Should Define the Following:

  1. Mindset;
  2. Trading system rules;
  3. The discipline needed to consistently carry out your plan,

Mindset

This is where you descriptively write out your goals about your Forex business. Why do you want to trade? What are you going to do to make your goals happen? How many hours a day will you be dedicated to researching and learning how the markets work? What will you do when you are feeling down and out about your trading? What visualizations do you see in your mind if you were a profitable trader. The only way to became any good at this game is by thinking your the best at it. The best forex traders have the right mindset to make it happen and with the right attitude anything you truly desire will come into your life.

“The starting point of all achievement is DESIRE. Keep this constantly in mind. Weak desire brings weak results, just as a small fire makes a small amount of heat.”  — Napoleon Hill

One of the greatest books on attitude and mindset is “Think and Grow Rick” by Napoleon Hill. This book will literally change your perspective on life and help you create a mindset of abundance. For under $10 you can get a copy of this book here. If you can’t afford a copy of this book or don’t think its important to your education about the markets you are wrong and you probably shouldn’t be a trader.

Trading system rules

Trading system rules is intended to help eliminate emotions as much as possible from your trading plan as emotions can destroy your account and should be avoided as much as possible. Rules, help eliminate the need to think things through, creates a sense of a robotic trading style one with no fear. In the end, your system rules should be used to determine whether you should be in the markets or not. Your system rules should mention the following four sections; setup conditions, entry rules, stop loss rules and your exit strategy.

forex exit strategy

Setup Conditions: In essence, you are first looking for the proper setup on the charts.What is the overall directional bias of the market? Is it in the direction of your trade? Which currencies will be in your list of currencies that you will trade? What strategies you have decided to use (i.e. trading pin bars or engulfing bars off key support and resistance levels). These initial conditions should all be laid out before even considering a trade.

  • In your list of financial currencies to trade?
  • Directional bias of the market?
  • Trade will use one of your trading strategies?

Entry Rules: Secondly, once your setup conditions have been meet the next process is to determine if the trade makes mathematical sense. Will this trade bear great risk? or will it have a small risk for its reward? Ideally, you are looking for trades with 2:1 reward – to -risk  ratio or greater. Another important trading entry rule is not to trade right before or after a high priority economic news announcement.

  • Does the trade make mathematical sense?
  • Does the trade have 2:1 or greater return over risk?
  • Is the trade right before or right after a major news announcement?


Initial Stop Rules: In the next step, you will need to determine if your trade is breaking your stop lose and risk rules. You have to make sure that this section is not just % risk per trade, but per day, week and month as well. This ensures your system against a total breakdown of your trading capital. If your system should surpass these parameters, you should stop trading and use the time off to analyze what went wrong. Also, you should also determine the amount of consecutive losing trades you will not feel comfortable with as an added risk parameter.

  • Are you risking more than 2% of your capital on this trade?
  • Have I surpassed my daily/weekly/monthly risk tolerance level?
  • Am I in consecutive losing streak?


Exit Strategy Rules:If you don’t exit a trade in the green you will never make money in forex. This is where it becomes important to know if your trade is following the trend or against the trend. Do you see any possible agents of the fed with you on your trade? If your trade is against the heavy players it might be wise to have smaller profit targets. Does your trade need to fight major resistance or support levels to make profit? At the end, you want your trades to effortlessly make you money without fighting the market much.

  • Do your trades need to go through a major resistance or support level to make money?
  • Does your trade follow a path of least resistance?
  • Do you have smaller profit targets for counter-trend trades?

In the event that you find yourself trading something other than what your plan has mentioned, then you are deviating from your plan and should then stop trading and re frame from what went wrong and analyze how you can maintain a level of discipline to keep your system from breaking a rule.

Discipline

In this section of your trading plan, you will answer questions like; What will you do if you do not follow one of the above trading rules? What guarantees will you take your trading seriously? How often will you analyze your trades?

It is highly recommended that you keep a trading journal. This allows you to analyze your trades and measure the success of your plan. My personal recommendation is that you take screenshots of every single trade you take and colour code them based on wins or losses. At the end of the trading week, it is then very helpful to review your trades to measure your actual performance, the mistakes incurred, and what improvements can be made for the following week. For the more technological traders you can use a free service like Myfxbook to track and analyze your trades automatically. In the end, you will need to know your strong strategies and focus more on those that make you money.

To give your plan more substance, have a checklist of what you are looking for in the market before deciding to enter a trade. Doing this helps promote discipline and avoid the careless moves that will only negatively affect your morale and bottom-line.

Trading plans are highly useful and effective as they reduce the possibility of mistakes and irrational decisions based on emotions. Such a plan will help you minimize your risks and thus your losses. In our Advanced Course, we take an in-depth look on how to build a successful trading business plan.

Tracking Your Trades

One of the most important steps to succeed in applying a successful trading plan is to track your trades. 

Applying your plan correctly is very important if you are going to maximize your profits, and very often it makes the difference between profit and loss in the long term. Tracking is a vital part of this process. To learn more about trading forex in 5 hours a day click here.

Many beginners think that they will remember their successes and failures. In fact, it is only the most memorable that stick in our minds. Record keeping is not sexy and at first glance you might not think it is a profitable use of your time. But in fact it is the easily forgotten average trades with their small gains and losses that will determine whether your system is successful in the long run.

Some traders start out with good intentions of recording their successes and failures but quickly lose interest. You may need a large number of trades to build up in either a demo or a real account before you can learn anything useful from your records, so it is hard to keep the motivation going.

In particular, if things are going well, you may think there is no need to keep a record because your system is perfect. But no system is perfect and sooner or later it will go through a bad patch. At that time you will desperately need an accurate record of your trades so that you can see what went wrong. Is it just the kind of blip you can statistically expect, or did you inadvertently start doing something differently that might have thrown the system out? Without records you will have no way of knowing, so if there is a problem, you cannot correct it.

Your forex trading records do not need to be complicated. All you need is a note of each trade that you make. You will need the opening and closing prices, the stop loss that you set, your profit target and your actual profit or loss. It often helps to add comments such as why you opened the trade (the signal that you acted on) and anything that you did that was different from your trading plan, e.g. Opening or closing earlier or later than your system proposes.

You could just write this down in a notebook, but most traders use excel or a similar spreadsheet. This makes it easy to analyze the trades to work out figures such as your average profit or loss per trade, your profit or loss over time or over a certain number of trades, and other statistics that may be useful if you find at a later stage that you need to make changes to the system. Take a few minutes at the weekend to look through your records for the past week and you might notice some interesting and profitable trends.

You will need a different record for each system that you follow, so that the results of individual systems are not hidden in the average. For example, you might be operating three systems and be making regular profits. Sounds like a good situation. But if you separate out the three systems, you could find that one is very successful, another is relatively successful and the third is actually making a loss. You could increase your profits by cutting out that third system. But you will not know this if you record them all mixed together.

So go ahead and set up separate spreadsheets for each of your systems now, and have them open on your computer whenever you are trading, to make best use of your currency trading training.