Creating an effective trading plan is not as tough as you think it is, but rather an achievable task. A wide research recently revealed that majority of traders especially the newbie’s are seriously finding it difficult to construct their own trading plan.
Why is it so?
Because they think it is so hard. However, you need not to be scared because it is not too hard or impossible as you think. Just relax and be rest assured that you can comfortably build your own trading plan at the end of this article.
So if you really want to make a living or a career with forex business, then you have to create your own trading plan.
Remember, it’s too risky to invest into forex without a TP (Trading plan).
How to construct your own trading plan(TP).
You can possibly achieve this through the following stages. All you need to do is to follow these steps duly.
Are you ready? Let’s proceed.
In this stage, there are 9 simple steps you need to fully digest. These steps are simply questions you need to ask yourself.
Note: since this T-plan is yours, it’s best you provide the answer alone (in the trading world you alone know yourself better).
Step 1: How many currency pair will I trade? Is it one specific currency pair or many more?
In this step, you need to be certain with the numbers of currency pair you want to trade.
For instance, Trader A might be certain to trade only EUR/USD while trader B will be certain to trade more than one, He might decides to trade EUR/USD, JPY/USD, GBP/JPY.
In other words, both trader A and B are certain of the number of currency pair(s) to trade while they enter the market.
Trader A= 1 currency pair (EUR/USD)
Trader B= 3 currency pairs (EUR/USD,JPY/USD,GBP/JPY)
Step 2: Will I trade fx on daily basis or will I hold my position for days?
Here, you need to be sure of how long you are willing to hold your position-is it for a day or days?
Consider this scenario; while planning, trader A was asked this question (at step 2) and he answered, stating clearly– ‘’ I trade only on daily basis’’. This is simply telling you that Trader A can’t hold a position more than a day.
You have to be very careful when answering this particular question.
Step 3: How much do I want to make from this trade?
In this spot, you have to be very careful- for if you are too greedy, you are jumping the gun, in other word you are polluting your trading plan.
Sometimes, some traders with the mindset of making every piece of money with a little equity invested in the market fails totally at this point.
You need to know how much you want to make from a trade.
Step 4: How much am I willing to lose per trade?
From this question, you’ll observe that you are planning your money management already.
You have to be certain of how much money you are willing to lose per trade (especially when the market is against you).
Hey! I don’t know how much to let go?
Well, It’s affirmed from research that a trader shouldn’t lose more than 5% of he or her current trading equity.
Trader A funded his account with $100 which is his current equity before entering the trade. If the market goes against Trader A, he shouldn’t lose more than $5 to the market.
Trader B invested $2000 into his trading account, following the calculation, he shouldn’t lose more than:
That is ,Trader B shouldn’t lose more than $100.
Step 5: How many consecutive losses will I tolerate before I stop trading for the day?
Just like I said earlier; you alone can answer this. This step simply wants you to be conscious of how many losses you will tolerate before you stop for the day.
You are directly and gradually building up your own money management skills by answering this.
Step6: How can I analyze the market?
Should I examine the price movement on my chart? (Technical analysis) or should I consider analyzing the market through looking at major events and news ( fundamental analysis) or by applying both.
Here, you need to carefully make your own decisions and also understand which one of the above methods suits you.
Remember this; your action in the market is the function of your analysis.
Step7: How do I use stop loss and take profit (SL and TP) to control my risk?
This is actually one of the risk control measure you have to adopt. You have to get yourself abreast with the knowledge of ‘’STOPS’’ and plan on how you could use this factor to control risks and manage your equity practically.
Step 8: What kind of profit can I fairly expect to gain from a trade?
You are in this business to make profit, isn’t it?
Here, it is simply telling you to be certain with the kind of profit you can satisfactorily look forward to from a trade.
Note: You have to define your profit, doing this is also a practical way to curb greed.
Step 9: How many profit targets will I have in a trade?
In this step, you have to be certain of how many profit target(s) you’ll have when trading.
For instance, is it one profit target (that is one currency pair) or multiple profit targets i.e. more than one currency pair?
Now, you are prepared for stage2.
After you have carefully noted the following steps above, you can proceed with stage2.
Answer all the questions effectively.
In this stage, you have to consider it more seriously. You start by answering all questions you are asked at (stage 1), then you use your answer to write out a simple, short and detailed trading plan of action. And lastly,
Sticking to Your Own Trading Plan.
Today, majority of us traders are still struggling with this stage-‘’sticking to one’s T-plan’’. They find it very challenging and this makes it look daunting to play along with. But then, if you ignore to adopt this stage, it means you have wasted your time preparing an effective plan.
If you remain focused, be rest assured that you are riding on the right path.
Preparing an effective trading plan is not as impossible as you think but can be achievable by following the stages we discussed above.
If you have more Tips on how to develop an effective trading plan, feel free to let me know through the commenting.
Forex trading is a very volatile business. Trade carefully.