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How to Develop a Trading Plan

The need for a Trading Plan

If you’re a beginner, it is important to understand the importance of entering the Forex market with an informed plan. There are a number of reasons for this:

  1. Trading is not a 9-5 job in which there is a set list of tasks that need to be completed and at the end of which your work is complete and after a set amount of time you will be given a set amount of money. It is based on initiative and strategy and being prepared.
  2. There is no one size fits all. If one trader has been successful following a plan, there is no guarantee that another will see the same kind of success. So it’s not the best idea to just pick a plan someone else is using.
  3. Everyone’s strengths and weaknesses are different. You need a plan that allows you to put to good use your strengths.
  4. It brings consistency into your trading and keeps one from trading emotionally or following whims.
  5. It will require you do some research and look into what forex trading is like before you get into it, and that is a prerequisite.

What it includes

  • Trading style (whether you want to be a day trader, position trader, swing trader or scalper).
  • The currency pairs you want to focus on
  • The frequency of your trades
  • Duration of trading
  • The analysis type that suits you (you could use a combination of technical and fundamental too, in fact this approach is recommended since this way you can benefit from both of their strengths.)
  • Risk management strategy (Stop Loss level, risk capital etc)
  • Leverage level

Above are some of the main components of a sound trading plan. These are some things you absolutely need to decide upon before formally beginning your trading career. Of course, as you learn and evolve as a trader you can make changes and adjustment.

A valid question, after looking at the list of things you need to work out, would be ‘how do I know what to choose?’

For someone who is just starting out it is very possible to not be sure about what would work for them. If you are in this kind of a tricky position, given below is a list of things that should clear some things up for you.

Think of the following as questions that you need to answer for yourself to be able to get to the bottom of the trading plan that would suit you best.

  • Trade capital: this is the amount you can invest into your forex account.
  • Profit expectations: what are you hoping to earn? You will need to calculate position sizes and currency pairs accordingly. This will also help you set your Take Profit.
  • Your strengths: fundamental analysis requires one to have a basic understanding of economics and the contributing factors to a currency’s strength. Technical analysis requires vigilance and understanding of the market sentiment and how to read it, as well as a lot of decisive action to make use of small price fluctuations.
  • Your weaknesses: these can be emotional weaknesses or a weakness in understanding. So maybe you’re good at understanding the bigger picture but aren’t too good at making quick decision about entry/exit. If this is the case, you might want to look into position or swing trading instead of day trading or scalping. And if you’re not too interested in understanding or researching the economic structure behind the currencies you’re trading, you might want to look into scalping using which one can make the most out of small movements within or without a trend.
  • Emotional strengths and weaknesses: what are the emotions that can make you go off course? It is important to identify them to be able to combat them. For example, anger at losing can cause one to start revenge trading at a time when trading that pair would be harmful.

These are some of the things to keep in mind when deciding upon your trading plan. It is very likely that the one you come up with at first will prove to have holes or you will find that your self-analysis was a bit faulty. That is totally normal. It is rare for first plans to turn out to be the ones a trader sticks to for the rest of their trading career.

So be prepared to make changes, but don’t give up on it too soon. A couple of days is too soon to decide that the trading plan needs to be completely revamped. Give it a couple of weeks at least, with low risk/reward trades in the beginning to give it a fair shot.

In the next section you will be introduced to commodities that serve as currency in forex and can be traded with the USD.

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