What is a forex trading plan? How are you going to create it properly? These questions will be properly addressed in this article. If you want to know more about forex and the importance of trading plans, you have gone to the right place.
What is an FX trading plan?
Just like in businesses, a trading plan will guide you throughout the entire process. It will serve as a framework that sets conditions as to when a trader should enter a trade, identify the market, how to exit trades, and manage all the risks involved. With a well-thought trading plan at hand, traders can ensure that they can stay focused mainly on important things and not be distracted by a surge of emotions.
How To Make A Trading Plan?
There are a few things to consider when creating a trading plan. This will ensure that the trading plan will work properly as you push through with your trades.
Choosing an Analytical Approach
How are you going to identify trading set-ups? Your analytical approach should answer the question. A good trading plan consists of a combination of trend lines, price support and resistance, moving average, chart patterns, Elliot wave Theory, Fibonacci levels, Ichimoku Clouds, and the use of fundamentals. Traders need to narrow such things so they can become comfortable as they trade.
Selecting A Trade Set-Up
If we are talking about the core of a trading process then you are referring to the trade set-up. These set-ups are particularly based on different factors that lead to a higher probability of trades. If you are a newbie in trading, you may find this process time consuming but very vital.
Limit The Markets You Trade On
Newbies should think of the market that they should focus on. They should also have a limit as to the number of markets that they trade on to be able to concentrate on the better good. It is also important to take note that no market is the same and there are limits of a market which can be a nuisance to other traders. Time frames are also important in trading so traders can familiarize themselves with the movement and characteristics of the market.
Considering the Holding Period
Different types of traders also have different time frames to follow. If you want to focus more on short-term trading then you should consider scalping and day trading. As for traders in the medium term who hold up their trades for hours and days, they may consider swing trading. And finally, for long-term trading, it takes up to weeks and months or even years in some cases.
Knowing the Risk Tolerance
All the things mentioned above are very important in trading. However, if risk management goes missing, everything will get messed up. Your entire trading plan will fall apart. This last but very important step allows traders to discover their risk tolerance, which corresponds to how they set up their stop losses to limit the risks in forex trading. The risk/reward ratio should also be considered here.