So you have probably heard of forex trading. You looked at it a bit and found that it stands for foreign exchange, and many have made a lot of money with it. Of course you want to take a chance on it and see where that takes you. Will it make you rich, or will it drain your account? Either way, you need a good trading plan before proceeding. That is not a guarantee of profit, but having a plan in place is always the best way to achieve success in the forex market.
What is a trading plan, you ask? Well, what we call a trading plan is basically a systemized approach to trading that takes into account various factors such as the current market situation and your own trading preferences. Simply put, it’s how you execute your trades depending on the situation and other rules that suit your preferred trading strategy and goals.
Advantages of a trading plan A
Perhaps the only downside to having a trading plan is that you have to think hard to come up with one. However, having a comprehensive trading plan gives you the following benefits:
- Trading is made easier. A trading plan basically provides you with set parameters based on various factors, and these make it easier for you to decide how to proceed with your trading if a particular situation arises.
- Your trading is more disciplined. Since you follow a plan that limits your trades and losses and gives you clear guidelines on what to do depending on the situation, you are unlikely to make emotional or irrational trading decisions.
- You can make decisions in a more objective way. The parameters set by your trading plan also provide you with objective guidance on when to take your profits or reduce your losses. This practically prevents you from acting blindly and takes emotion-based decision making out of the equation.
- It gives you more opportunities to learn. A trading plan always requires you to create records. You can view these records to learn what works and what part of your trading strategy you need to improve on.
How do you create your own trading plan?
It is never too late to come up with a trading plan as long as you still have the opportunity to invest. Here are the basic steps to follow to create a comprehensive trading plan:
- Determine your motivation. Knowing why you want to trade in the first place is crucial to learning how much time you want to spend trading and how to plan your trades.
- Know how much time you can put into trading. Based on your current personal situation or your preference, you need to know when and how much time you should spend trading on a daily basis.
- Set your goals. Your goals must be SMART – that is, you must have specific numbers, measurable good luck, achievable with your current capabilities, relevant to act, and time-bound.
- Determine a reasonable risk-reward ratio. Also known as RRR, this is the ratio of your losses to your rewards, and to determine this you need to know how much risk you can afford to take. Many traders recommend an RRR of 1:3.
- Set up a trading capital. This also depends on the risks you are willing to take, but make sure you don’t set more than a portion of your budget that you can afford to lose.
- Know your market. Learning your market is crucial to trading as it gives you a rough idea of how it moves and what decisions you need to make on a given move.
- Support your trading plan with a journal. A trading journal serves as your documentation and it is useful if you want to improve your trading strategy.
A trading plan should serve as the backbone of your trading strategy. Therefore, take the time to create a comprehensive plan that covers most, if not all, market situations.
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