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Why Do You Need A Forex Trading Plan?

By Louis Holding-Parsons on November 28, 2018

5 (100%) 2 votes

Markets are by definition volatile. There is little chance that you will be able to predict every move and react in the way needed. That’s why having a Forex trading plan is important. This plan will ensure when you trade, it is with purpose, rather than on a whim. A Forex trading plan takes the emotion out of trading, introducing discipline and a process designed to lessen the impact of mistakes.

Why do you need one?

A Forex trading plan can take emotions out of tradingHumans are emotional and prone to over-reacting to events. This lack of farsightedness, encourages traders to open positions which in the cold light of day they never would of. Some traders are more emotional than others. You can’t stop yourself from having emotions but you can reduce their impact. Reacting to events and letting emotions dictate your thought process is not a good combination!

This emotional approach to life makes humans poorly set up to trade. We are also easily distracted. We see a price drop and immediately assume it is a buying opportunity. Yet our first thought should be, does it fit into our own pre-established plan? A Forex trading plan ensures that if you follow its rules you will not let emotions get the better of you! 

A Forex trading plan also helps stop mission creep from setting in. This occurs when your initial aim is met but you hang on longer in the hope of making even more. You usually end up losing it all in the process! That’s why creating a trading plan which has exit parameters is important, as it will help you trade successfully.

How do you create one?

Creating a Forex trading plan is not something which will happen overnight. It takes time. For traders learning to trade Forex, it is worth starting with a demo account before opening a live trading account. This will give you a chance to test your theories, make mistakes, discover what kind of trader you are and the strategy which works for you. Once you have worked out if you are a swing trader, scalper or prefer other trading strategies, you can refine your trading plan. 

Your Forex trading plan should highlight how you intend to profitThere should be a healthy dose of reality in your Forex trading plan. For example, you should have worked out your objective. Are you looking for a 2/3% profit over minutes/hours, or are you looking for 10-15% over a couple of days? Working out what position size you should be taking for your strategy should be paramount. Taking small positions, such as 2/3% of your portfolio, is the name of the game. Understanding your weakness, and having exit strategies should also be part of your Forex trading plan.

Learn to adjust your Forex trading plan

Every Forex trading plan will have to evolve at times. As you develop as a trader, you will want to record your experiences to be able to go back and review where you can improve. You should not fear making mistakes, as these experiences will help you grow as a trader. Many aspiring traders will start by copying someone else’s Forex trading plan, strategy or ideas. There is nothing wrong with copying a winner, but evolving that plan into one which fits your trading style will ensure you trade profitably regularly.

What is your risk tolerance?

Your Forex trading plan should highlight your risk toleranceWhen creating a Forex trading plan, you will need to decide what level of risk you are prepared to take. Your ability to stomach risk will be dependent on how much you can financially lose, and how much your emotions can handle losing. This will be different for each trader. Creating a risk management plan with rules to encourage you to step away when you’re having a bad day will keep you fighting for another day! This can be as little as 1% loss per day for some and 10% loss per day for others. Separately a risk-based approach, where you prioritise risk management over trading profits can also help.

Exit strategy

You think you’ve identified a successful trade, you take a 2% position and the trade is soon up by 10%… now what do you do? Sell? Hold on for more? Sell half? These are questions you should have already have answered in your Forex trading plan. Knowing when to take profits is just as important as identifying successful trades. Allowing yourself to be tempted into chasing bigger profits will often lead you to lose out! This also means knowing when to close a trade which is plainly not working.

What happens if you don’t have a plan

Your Forex trading plan should give you a sense of directionRome was not built in a day, but Rome did have an idea of what it wanted to become. Having a clear goal where you want to go needs to be planned. If you don’t have a Forex trading plan you are likely to follow all manner of tangents without having a clear direction. This will create losses which could have been avoided. This may lead you to lose so much of your capital that you are unable to trade effectively. Forex trading is a brutally honest business, where one’s pride and emotions can be hit. If you lose part of portfolio early on, you may quit and not discover your full potential as a trader.

Conclusion

Entering the trading arena without a Forex trading plan is foolhardy. In life there are winners and losers. Winners lose all the time but learn from these mistakes to create a trading plan which evolves with their experiences. Losers never learn and keep losing. Which are you? You will lose money on trades but you will also have profitable trades. In time your Forex trading plan will help you reduce the former and increase the latter. Developing a Forex trading plan will help turn you into a consistently profitable trader.

 

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Louis Holding-Parsons

Louis is a portfolio manager and a trader who brings a wealth of experience in private banking to The Lazy Trader. A fundamentalist and a trouble-shooter, Louis makes a firm contribution to the trading team.

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Louis Holding-Parsons

Louis is a portfolio manager and a trader who brings a wealth of experience in private banking to The Lazy Trader. A fundamentalist and a trouble-shooter, Louis makes a firm contribution to the trading team.

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