When creating a currency trading plan, it is crucial to make sure you cover some main bases. Like any endeavor, trading starts with some set of rules.
In setting up these rules, you should be aware of the following questions:
- Your Motivation – What are the reasons for trade? How do I become a successful forex trader?
- Trading Goals – What do you want to achieve when trading? Can forex trading make you rich?
- Risk Management – What do you mean by risk management? What are your parameters for risk?
- Money Management – What is meant by money management? What will you do after certain percentage losses or gains?
- Methodology – What should be included in a trading plan? How you enter and exit the markets?
- Your Routine – How do you create a day trading strategy? How will your day plan out?
- Journaling – How will you document your trades and trading activity? How do you win trading and not losing afterward?
Motivation: What are the Reasons for Trade?
No one but you can answer this question. Therefore, it is vital to establish why you want to trade. What is your known or secret agenda?
Of course, this could be for several reasons. Seemingly, it is unlocking the realm of your drives and subconsciousness. For example, it could be:
- To become a full-time trader and work for yourself
- Achieving financial freedom
- Improve your present finance conditions
- Supplement your income
- Work towards achieving some goal
All of this would help to answer how do I become a successful forex trader. Since it is an extremely tough endeavor, motivation is a significant driver.
Since trading needs a persistent and determined persona, motivation is an integral part of trading psychology. Sometimes, it can get tough, and if you have a string of losses or bad days – you can quit.
When having a pure motivation, it will drive you to get back to the desk and persist. In this case, the chances are high that you will achieve your ultimate goals.
Goals: Can Forex Trading Make you Rich?
Getting rich by utilizing some currency trading plan is the goal of most traders. Of course, this might not be the case for all since the successful strategy is a goal of itself. At the same time, some work for fame.
In this case, it is essential to divide goals from motivation. It is because your goals should be S.M.A.R.T. It is best to use the methodology of defining your goals as:
These goals could be getting a certain percentage of growth. Setting these goals for a week/month/year will get you a focus. Of course, you can’t achieve a goal without an action.
As a result of the actions you take, your account will grow. Eventually, you will have more money in stake and compound profits. For this reason, you should stay true to your goals and focus on achieving them.
Risk Management: What do You Mean by Risk Management?
There is a big difference in the perception of risk. For some, losing property or savings is an attainable risk. Others find this quite disturbing.
For this reason, you should be able to decide what is the risk for you. It is because it is one of the most important factors when trading.
Regardless of which markets you trade, handling risk is crucial to becoming a successful trader or investor. It is because it is a part of the viable trading strategy.
Similar to the percentage of growth, you will need to have clear rules on the portion of risk per trade. Furthermore, make sure that the amount that you are risking is something that you can handle.
Why would you risk 5% of your account if your risk tolerance is low? Seemingly, this will only lead to trading while scared, and more often than not, you will end up blowing your account. The percentage of this happening is more often than not to a lot of new traders.
The recommended risk amount usually is between 1% to 5%. However, I suggest not risking anything more than 2% of your overall account on a trade. Keeping losses low will help to keep you in the game for the long run.
It is vital to remember that your percentage of return per trade is important, too. If you are risking 2% but only gaining 1%, it will only be a matter of time until you will be wiped out completely. In this case, your profit target is too low. Therefore, make sure to have a minimum of a 2:1 return on each trade.
Money Management: What is Meant by Money Management?
Similar to the risk, money management is also subjective. It is because each of us looks upon the money differently. As there is a life to live, you should watch out if the trading is influencing it.
This influence can come in a myriad of ways. Therefore, money management is different than risk management. It is because of the effect of a sudden gain or suddenly loses on your psychology.
For example, if your tolerance for loss is reasonably high, you should stop for a moment. Sometimes, it is good to pause trading for a week. At the same time, it is sometimes wise to give yourself a treat of some kind. It is viable as long as it doesn’t influence your trading account.
If not overspending, you will be able to preserve capital and keep yourself in the game in the long run. Remember, trading is a marathon. You need strength to keep on running. When having sound money management, you are keeping records of monthly gains and losses. Not chasing trades and reducing the risk of any “revenge trading” can keep your account.
The final point is that when you are starting with a smaller account, you should not take money from it. It is wise not to withdraw any profits from the compound. Similarly, a sound strategy is to deposit cash per quarter, depending on your trading performance.
All of this can help to build your account and ultimately help you achieve your goals.
Methodology: What Should be Included in a Currency Trading Plan?
Above all, everyone has its methodology that suits the most.
Your methodology should be outlining your strategy for entering and exiting the market. Moreover, you will need to describe it in detail so that you know what you want to look for and how to execute it.
In this case, it is essential to manage the potential position you have.
Some of the key points to add:
- What determines your directional bias
- Your entry point (your strategy for entering)
- How will you manage the position when it is in the market
- When will you exit from that position
Your Routine: How do you Create a Day Trading Strategy?
Whatever type of trading you choose, you should have a day to day plan. When choosing scalping or day trading, you can follow it entirely without an effort. However, for a swing currency trading plan, you will have to do a lot of research.
You will need to know a lot before you enter the market. Besides researching the fundamentals, it involves a lot of technical analysis, too.
In this case, it is determining different directional biases on certain assets. Moreover, looking at the previous days, weeks, and months price depending on the timeframe of trade.
Seemingly, it is a matter of how you will function while in the market. Will you have a lunch break at certain times? Will you take a break after entering a trade? What time will you finish your day?
At the same time, you should define whether you will go through your days’ trades and analyze performance on the go. Or you will note down anything important which brings us on to the final phase of the trading plan.
Journaling: Progress of Currency Trading Plan
From someone with experience in creating a currency trading plan, I really cannot stress the importance of journaling enough. Seemingly, this is a vital part of helping you to become a successful trader. Therefore, you should implement it every day.
When able to note down as much information as possible about your entries, you will have a lot of information. The more information you have, you can take a better look back and analyze trends.
For example, it may happen for a particular pair where your stop loss is too short. If you hadn’t journaled your trades, you might not notice this.
However, if they are all noted down, then you can review them each week or month or quarter. Consequently, you will understand the areas you need to improve. In another case, you can tweak and justify those that are working correctly.
Journaling has helped to improve many traders’ results in the market, including my own.
Start Creating Your Currency Trading Plan
Answering this question is essential to creating a solid currency trading plan. It’s a tough business, so remember to be disciplined and persevere when times get tough, which they inevitably will at points.
Good luck with your journey, traders!