A trading plan can be relatively simple or it can be complex. In forex, a trading plan is essential to traders as it brings routine and calm to the trading process. Using a trading plan, a trader can make better decisions, trade in a more relaxed way, and therefore be more prepared to overcome any unforeseen hurdles.
Money management
All traders agree that an essential part of any trading plan is money management. Before you set out to trade it’s essential that you know how much you will be risking on any one trade. If you plan on taking different types of trades, or if you plan to trade whenever you see an opportunity, that’s fine, but you still need to be aware of your capital and trade the right size at the right time.
The best way to know what size to trade is through experience and back-testing your strategy. Everyone’s risk profile will be different but always err on the side of caution.
Heuristic approach
Any trading plan that you make needs to be developed using an ongoing, heuristic approach. This means using experienced based techniques for problem solving, learning and discovery.
It basically ensures that you keep your eyes open and never lose out on learning from the market. In forex, it’s forgivable to make a mistake, but to refuse to learn from that mistake is unforgivable.
Prepare for different scenarios
A key thing to remember when forming a trading plan is that you need to account for different scenarios developing. When you place a trade, you will likely be in an optimistic state of mind and believe 100% that your trade is a good one.
However, the truth is anything can happen so you need to think of several different scenarios.
If your trade is good, when will you take your profit? Will you add to your position? If your trade starts to lose money, will you wait for it to turn around or will you cut it quickly? What will you do if the fundamentals change drastically or if stock markets collapse? How will that affect your position?
If you haven’t already, it’s a good idea to set up a trading journal and this can also be used to hold the details of your trading plan.
Putting the plan into action
A good trading plan is only helpful if it is followed and this is a crucial aspect that some traders miss. Sometimes, in the heat of the moment, or when losing money on a trade, it can be tempted to throw the plan out of the window and trade purely by gut instinct.
If this occurs, it’s a good idea to ask yourself why you created a trading plan in the first place. Since, what’ the point in creating a plan if you don’t follow it at the most crucial time?
A Guest Post By FXTM
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