Developing a Forex Trading Plan Part 1

While it’s always a good idea to learn from other traders, it’s equally important to be your own trader, rather than blindly following the strategies of others. Just because somebody else is succeeding with a particular methodology doesn’t mean that it will work for you.

plan-forexthinkEvery trader is in a different situation, with differing market views, risk tolerance levels, thought processes, and degrees of market experience. That’s why it’s important to develop your own forex trading plan, and continually update it to reflect your real-world trading experience.

Naturally, a good trading plan will only be effective if you stick to it. Let me repeat that, because it’s important.

A good trading plan will only be effective if you stick to it.

We’re not talking about sticking to it some of the time, or even most of the time. We mean all of the time. Now, if your trading plan turns out to be flawed in some profound way, then of course you need to correct it, but this should be done as part of a process of reflection, rather than in the process of trading.

What is a Trading Plan?

A trading plan is something that defines the what, why, when, and how of your trading activities, taking into account your personality as a trader, your personal expectations, trading system(s), and risk management rules.

When you stick to a trading plan, it should help you minimize losses and limit your trading mistakes. It achieves this by taking your emotions out of the equation when your are trading, thereby removing any possibility of bad decision making in the heat of the moment.

A trading plan is most effective when it minimizes (but not eliminates) the amount of thinking that you have to do while trading by having a plan for every potential market situation. With a plan such as this, every action is mapped out in advance so that you don’t have to make any rash decisions in the heat of battle. All you have to do is stick to your trading plan.

Is it the same thing as a trading system?

The short answer to this is no. A trading system is a way of describing how you will enter and exit trades. While it can form part of your trading plan, it is only one of a number of important parts, which includes analysis, risk management, executions etc. Because market conditions are always changing, it’s important to have more than one trading system included in your trading plan.

In this series, we’re going to be showing you how to create a unique trading plan that works for you, taking in aspects such as self-evaluation, goal-setting, risk tolerance, your pre-market routine, and the tools of the trade.

Other articles in this series:

Developing a Forex Trading Plan – Part 2

Developing a Forex Trading Plan – Part 3