Techniques of successful traders
How to create a forex trading plan
A trading plan is especially important for FX traders.
When the markets are at their most stressful, you don’t want to have to rely on your judgement alone. With a trading plan in place and written down, you’ll find it much easier to remain focused on your trading objectives. A plan tells you precisely what to do, so you can maintain discipline and consistency while keeping losses in check.
Use the guide below to plan and write out a 9-step forex trading plan.
- Evaluate yourself
- Choose your trading style
- Pay attention to trading times
- Use stops and limits
- Identify currency pairs to trade
- Plan for rollover rates
- Readjust your trading plan?
- Know the regulations where you trade
- Take care of the details
TIP - A plan is useless unless it is put into action. Many make the mistake of investing a lot of time into creating a strategy, but then discarding it when they start trading the markets.
1. Evaluate yourself
To build a trading plan, you first of all need to take a step back and evaluate your market expertise, goals and weaknesses. After all, you want your plan to be as tailored to you as possible.
Start by assessing your knowledge of the markets, so you can ensure that you don’t get out of your depth. If you’re a total beginner, for example, then advanced options strategies might not be a great place to start.
It’s also a good idea to identify which asset classes you are most comfortable with and consider picking a handful of markets to focus on at the outset.
As you grow in confidence, you can always come back and tweak your plan.
Why are you trading? If the answer is just ‘to make money’, then you may not have thought this through enough.
Perhaps you want to get a little extra for retirement, start a new career, or free up time to spend with friends and family. Whatever your end goal is, make sure that your plan is made with your motivation in mind.
One of the best ways to do this is to start at your end goal and work backwards. Consider where you want to be in ten years, and set ten annual milestones that will get you there.
Strengths and weaknesses
You’ll want your trading plan to play to your strengths and mitigate your weaknesses.
For example, you might need to constantly watch your open positions, which can be tricky if you are holding trades overnight. You could address this weakness by sticking to day trading or using notifications and alerts to keep track of trades without always watching your trading platform.
You’ll learn more about your strengths and weaknesses as you progress, so make sure to revisit and edit your plan periodically.
2. Choose your trading style
Now that you have laid out your expertise, goals, strengths and weaknesses, you should be able to identify which style of trading suits you best.
If you’re targeting long-term returns and don’t want to dedicate too much time each day to opening and closing positions, for example, position or swing trading may suit you well. Or if you are planning on trading full time but want to avoid paying overnight funding, you could consider day trading.
Want to learn more about trading styles? Start the Mastering forex course.
3. Pay attention to trading times
Although forex trading is a 24/5 business, there are standard peak times of increased activity.
When the London and European markets open, for example, volume intensifies as institutional traders move the forex markets. Then, once the New York session opens, forex trading volume increases again.
There is a lull between New York markets closing and the Sydney session opening. When trading volume reduces, spreads might widen, markets might be stagnant, and the fills you get might not be as precise.
You could be in danger of trading noise when the forex markets have little direction.
If your plan isn’t working as it should be, it might be because you’re trading at the wrong time.
4. Use stops and limits
The fast-moving nature of forex means that stops and limits are highly recommended for every single trade.
As we’ve covered in the course, it’s often a good idea to outline your maximum risk on any opportunity as part of your plan. Then, ensure you use a stop to minimize your risk there, as well as a limit at your profit target.
You might also want to think about setting a personal circuit breaker – for example, to stop you from trading if you reach a daily loss of 5%.
5. Identify currency pairs to trade
Within your trading plan, you might want to earmark the currency pairs you wish to trade. The major currency pairs tend to have the tightest and most consistent spreads, partly due to trading volume.
Developing trading methods and strategies built around the majors allows you to concentrate your attention on a few pairs rather than looking to match your technique on a wide range of currency pairs. You can also adjust your economic calendar to isolate medium- and high-impact news relevant to the major currency pairs exclusively.
As they are traded in pairs, many forex markets are closely correlated, meaning that if one moves, there’s a strong likelihood that the other will as well.
One of the most referenced forex correlations, for example, exists between EUR/USD and USD/CHF. This is actually a negative correlation: when one pair rises, the other tends to fall and vice versa.
Knowing about correlations is useful for managing your risk and capital. After all, if you have several similar positions on closely correlated pairs, then one major move could affect all your trades in the same way.
6. Plan for rollover rates
When trading currencies, you borrow one currency to purchase another. The rollover rate is the interest charged or earned for holding positions overnight. A rollover interest fee is calculated based on the difference between the traded currencies’ two interest rates.
For EUR/USD, if the swap rates were 0.817/1.28, on a long position of 10,000, you would be charged $1.28 to hold the position overnight. If you sell 10,000 EUR/USD, you would receive $0.82 overnight.
7. Readjust your trading plan
During your early months of live forex trading, you’ll encounter various market conditions and events. Your plan might work well for some of them, but not others.
This is why adjusting your trading plan as you go along is such a good idea. You can learn from your mistakes, build on your successes, and ensure that you’re always adapting. Many successful traders keep a trading diary to track wins, losses, emotions, and the market conditions each day.
8. Know the regulations where you trade
Regulatory bodies determine the leverage and margin you can use to trade the forex markets. These rules impact what currency pairs you can buy and sell and the size of account you can manage.
Most credible forex brokers ensure they have regulations in all the areas they operate and where their clients are based. FOREX.com, for example, works with regulators in every country we cover.
9. Take care of the details
The final step when creating a successful forex trading plan is to add as much detail as possible. Lay out precisely which markets you’re going to trade and when. Decide how much capital to allocate to each position, as well as where to set stops and limits.
A checklist can be a useful reminder to use in practice. It helps to set your chosen path and reinforces why you are trading. Ideally, your checklist should cover every step when finding opportunities, opening trades, and managing positions.
Finally, consider keeping a trading diary. This enables you to see precisely how your trading journey is progressing, so you can identify your strengths and weaknesses, eliminate mistakes, and build on successes.
Your trading diary can be as detailed as you want. But at a minimum, it should cover your:
- Reasoning behind each trade
- Profit target and maximum loss
- Entry and exit levels
- Emotions as you entered and exited the position
A trading diary can also help you see whether you are trading consistently. If you can ensure that you are consistent with your trading strategy, then you can see where it is going wrong and tweak it accordingly.
Test your knowledge
- A To ensure that you trade consistently
- B To help stay focused on your objectives
- C To guide you when trading is stressful
- D All of the above
- A True
- B False
- A Your emotions as you trade
- B Details of each position
- C The weather