If you trade forex, you need a trading plan if you wish to become a consistent winner and to be able to make trading decisions fast and accurately.
Here are the most important tips a forex trader can use to develop a trading plan:
1. Are You A Day Trader Or A Swing Trader, or How Often Are You Going To Trade?
The day trader will benefit by trading the short and sometimes almost instantaneous trade signals that bring in profits. Your trading plan will need to either concentrate on momentum or on recognition of price patterns that recur within short time frames. Many day traders trade on price levels, fibonacci or retracements only- without indicators. If you are a swing trader, your trading system will involve trading signals over a longer period, and may involve indicators such as bollinger bands, price levels, longer term momentum, overbought and oversold indicators such as stochastics and so on. The most important thing is your system must be built around your trading profile- and what type of trader you are.
2. What Amount of Risk Are You Going To Tolerate.
Your trading plan will include a trigger that will automatically set in to cut your losses short if the trade goes against you. What amount of risk or losses are you going to tolerate before you cut loss?
2. How much Gains or Profits Are You Aiming For?
A gain is a gain irrespective of its quantum, and where there are no commissions involved in trading, the smallest gain represents a profit. Is your trading plan going to be built upon a fixed amount of gains each trade signal will produce or a flexible amount? In other words, are you aiming for a fixed risk-reward ratio system or a flexible system, and able to take more risks as long as there is reward in sight? Set stops for the initial trade and a trailing loss as the trade progresses.
3. System Decay
All systems do decay especially if they are built upon indicators and need to be optimised or re-tuned or tweaked after they show signs of losing their effectiveness. That is why price-action trading systems do not make use of indicators except price itself and work continuously and are so popular among forex traders. Be on the look out to consider tweaking your system and your trading plan once it shows signs of ineffectiveness or when your trades are affected.
4. External Factors- How Sensitive Is Your Trading Plan?
Your trading plan can be affected by adverse changes by your broker's policies. For example, changes to the trading platform from your broker can affect your charting features, or if there is a change of the spread, this can adversely affect your gains and losses, and make your trading plan go awry. Developments in monetary policies can adversely affect your trading plan especially if it is built upon "razor thin "gains that you are willing to take irrespective of the risk. Watch out always for news releases that impact upon financial matters.
There are trading plans developed by professional forex traders that you can follow. If you choose to go the way of "canned" trading plans developed by others, make sure they are actual traders who have out their trading plans to work in the market. Go for trading blueprints developed by actual forex traders who are known to be making profits, and consider plans that are easy to follow and robust under most trading circumstances. Your success or failure as a trader depends greatly on your trading plan. Give it your maximum attention and consideration.
