An overall forex trade plan is your trading blueprint or equivalent to a business plan. It will show you where you currently are as a trader and help you get to your destination – consistent profitability.
Devising a forex trade plan is something a lot of traders put on the backburner, too eager to “get out there” and trade, with no direction to follow or specific ambitions to fulfil. Look at it this way, you wouldn’t start a business without a business plan, and with forex it’s the same, never start trading until you have a forex trade plan in place.
Success in the markets is a function of discipline, and most people simply do not have enough self-discipline to determine if they are trading emotionally or objectively. This is where having a defined forex trade plan comes in; a forex trade plan will act as a guide which will keep you on the disciplined trading path.
Trading without a forex trade plan would be the same thing as driving without knowing where you’re going. You’re trying to get to this goal of “consistent profits,” but since you have no way of knowing whether you’re heading in the right direction, you’ll most likely end up going bust.
With a forex trade plan, you’re able to know if you’re heading in the right direction. You’ll have a framework to measure your trading performance and you are able to monitor this continually. This allows you trade with less emotion and stress.
Forex trade plan
Without a forex trade plan, this would be nearly impossible. Instead, you’d be a “cowboy trader”, shooting from the hip, relying on your gut, guesses or signals from strangers. That isn’t successful trading – that’s gambling!Patience is one of the best and most important virtues that any forex trader can have. Being patient and waiting for only the “best” price action setups will greatly improve not only your win rate but also your confidence, because when you are trading with a high accuracy you are naturally going to boost your confidence.
The psychology behind this process revolves around the feeling of euphoria or over-confidence that often hits traders as they become more accurate in their trades, which is almost always a result of having patience long enough to wait for a string of high-quality setups.
It is very easy within forex to become over excited and eager and jump into too quickly due to over confidence and euphoria. Being able to walk away in the heat of the moment and reflect on what your about to do without impulse trading is key to any successful forex trader
One of the best ways to not let emotions influence your trading activities is to have a defined forex trade plan that describes in concrete terms what you will do in any given market scenario. Many traders do not attempt to have a trading plan because they aren’t really sure where to begin or how to write one. It really does not need to be extremely long or complicated to be effective.
What does a forex trade plan consist of?
A forex trade plan defines what is supposed to be done, why, when, and how. It covers your trader personality, personal expectations, risk management rules, and trading systems. Below is an example of the key points that should be in any effective forex trade plan:- Define your entry strategy. It doesn’t matter what kind of chart you are entering on or your reasons for it. Just make sure you can define how to enter and that you know what constitutes a good quality entry from one that is lesser in quality.
- Determine the risk to reward scenario on any potential trade setup before entering it. Also, make sure you have a thorough understanding of position sizing Adjust the position size on the trade to meet the necessary stop-loss distance, NEVER adjust the stop-loss to meet a desired position size, this is greed plain and simple.
- Know what your exit strategy is BEFORE entering the trade, if you are not exiting on a pre-set risk to reward setup, than make certain you don’t tell yourself that you will just make a decision as the trade unfolds, this NEVER works. You are never going to be more objective than when you are not in a trade, therefore this is the best time to plan out all trading.
- After the trade is over, make sure your trade plan includes an activity or some mandatory thing that you do after you have exited a trade, whether it was a winner or a loser. The period of time right after a trade is one of the most, if not the most, emotionally sensitive period for traders. Feelings of revenge, frustration, and disappointment can cause you to jump right back into the market on a whim, with no real setup present, obviously this is likely to cause you even further psychological harm because you will likely lose even more money, and the cycle will continue.
- Winning trades also need a period of inactivity once they are closed out. It is very easy to feel over-confident or “in control” of the market after a string of winning trades. What happens next is that traders often enter a trade on a whim again but this time they are at even greater risk because they are feeling euphoric and they decide to risk more than usual, only to see all their recent profits evaporate in the blink of an eye.
However no matter how much preparation you put in, none of this will work if you don’t follow your forex trade plan. Self discipline within forex is key to successful trading, and a forex trade plan is a great way to MINIMIZE however, not ELIMINATE risk.
The main purpose of the forex trade plan is to keep you on task, and to operate in an effective and efficient manner to make good trading decisions. It is, however, only as good as you make it, and it is completely useless if it is not applied in practice. View video here http://www.youtube.com/watch?v=ajGOb_f5wgw&feature=youtu.be