The Five Essential Elements of a Good Forex Trading Plan

 

As the old saying goes, ‘A failure to plan is a plan for failure’, and nowhere is this more true than in the field of Forex trading. Today, we have a guest post on this very subject from renowned currency trading expert Mario Singh,  who shares his experiences and expertise on Forex trading strategies at Askmariosingh.com.

Strategy is the Key

There are many things you can do to succeed in forex trading, but one thing that is an absolute imperative to success is creating a good forex trading plan.

trading-planA forex trading plan helps concretize your trading strategy. It also helps discourage you from veering away from your identified strategies. A good plan will also help lessen the chances for greed, impulsiveness and becoming overconfident. Why is this so? Well because a “map” is already laid down before you.

Actually a map is a great analogy for a forex trading plan. When you preparing a long drive to a destination you haven’t been to before you make preparations for the journey and you map out your directions on a map. Only the most foolish drivers would deviate from an already clearly defined path that will bring you to your destination. Failure to follow the map will only lead to more chances of getting lost. In this case, failure means losing a lot of money.

But what makes a good forex trading plan? A good plan will have the following essential elements:

An established entry point

You can never trade with any effectiveness without looking at the technicals. You need to study charts, technical indicators and trading signals to help you decide on the best entry point that will maximize the profits but also minimizing the risk at the same time. Your entry rules must be exhaustively based on your research. Some traders say the more complicated the entry rules, the more effective it is. But it shouldn’t be overly complicated though, your entry rules should still be simple enough that you can implement it on the fly. Forex trading also entails quick decisions and simple rules help make this happen.

A clear exit

Aside from an established entry point, a good forex trading plan also has a clearly identified exit point. You can’t let your trade run indefinitely – that’s trading suicide. Just like you studied your entry point, you should also study when the best exit point should be. But for conservative trading, letting a trade run for 20 pips is a good exit strategy. You may be surprised to know, especially if you’re still new to forex trading, that exit rules are more important than entry rules. The reason is simple, you are bound to lose more money or fail to maximize profits with wrong exit rules.

A Stop-Loss Implementation

take-profit-and-stop-loss4One of the characteristics of the forex market is that it moves fast. If you are not in the habit of watching your trades, you may be caught in a market reversal that moves so fast you’ll lose your investment before you even realize what’s happening. This is a very real danger of forex trading, that’s why a stop-loss order is one basic trading order you should always implement. A stop-loss is an automatic trading order that will stop your buy or sell order when the market moves against your position, minimizing your loss. The order will automatically take effect depending on the number of pips you indicate in the order. Part of your research is to determine the best stop-loss for your kind of trading strategy and style. You can customize how much risk you are willing to expose yourself based on your position and the size of your trade.

A Risk Limit

A stop-loss helps you limit your risk when you trade. This is different from a risk limit, which is the amount of risk you are willing to expose yourself. You should have a clearly defined level of risk that you need to identify. The main goal of a risk limit is to protect your capital as much as possible. The usual rule when setting risk limits is to expose from between one to five percent of your portfolio on a particular trading day. If you lose the limit you’ve imposed on yourself then you get out of the trade – and you remain out until the next day. Of course, this rule can be changed based on the kind of trading personality you have.

Constant Practice

Trading in the currency market is not a something you learn and master in just a few weeks. Although you can learn forex trading fundamentals relatively quickly, mastering the art and science of trading (yes, it is both an art and science) takes a lot of dedication and practice. To continue your education and also hone your skills, set up a practice account where you can trade without having to expose your capital. Make practice trades as much as you can.

Constant practice also means learning to use the many technical tools that are at your disposal. Use various tools as part of your practice so you’ll learn how to properly read the various charts and graphs and discover their nuances and intricacies.

One good description of good traders is that they are also good at keeping records. Record keeping and keeping track of all your trades is not just a sign of how serious you are, it also shows that you are aware that all of your previous trades are one of the best tools you have at your disposal to improve. Pore over your records and determine why you won in a particular trade and lost in another. You need to have a firm grasp of what you’ve done before in order to realize where you’ve gone wrong and where you got it right. You can then apply those lessons on your future trades.