In such a fast-paced and highly dynamic market like forex, planning is everything and truly separates the pros from the amateurs.
Every trader is motivated to trade the markets for financial gain. We all understand any leveraged instrument like currencies is highly risky and needs sufficient capital.
Moreover, you need a ‘battle-tested’ strategy that will yield you profits in your chosen markets over the long haul. At this point, you should already know whether you’re a scalper, day trader, swing trader, or position trader.
Now comes the trading plan. This article will highlight which components should make up this comprehensive decision-making blueprint from planning all the way to the exit.
The main takeaway is that a trading opportunity consists of a series of phases that you should plan for well in advance.
Entering into a position may only take a second, but getting to this stage takes a lot of preparation. Your trading plan should cover the markets you scan for opportunities at this phase.
Do you only look at a few forex pairs, all the majors and minor pairs, or do you include exotics as well? Furthermore, how often do you check the markets; is it every hour or every few hours?
The best way of keeping track is using some form of watchlist with price alerts where necessary. Of all the pairs you analyze, you might highlight one or two of those you believe could materialize into ideal opportunities.
Before you enter into a trade, you should consistently anticipate how you believe the market might react at certain ‘trigger points’ even before the ideal setup presents itself.
You could play out scenarios in your head by looking at correlated markets. For instance, if you saw EURUSD approaching a support area, you would begin to think how that will consequently affect other USD-based pairs.
Overall, even before you press the buy or sell button, you’ve anticipated what could happen over the next few hours or however long you need to wait. When entry time comes, you are less reactive, making you commit fewer unnecessary mistakes.
Now comes entry time. After identifying what you believe is an excellent opportunity to buy or sell, one should have a checklist for their entry parameters for double-checking purposes.
The most critical part of the entry phase is money management. A trader will need to work out the appropriate lot size to implement using a position size calculator. Of course, when using this tool, you would also decide the stop loss distance and where it will be placed on your platform.
It’s generally recommended never to use one-click trading but rather enter with a manual order ticket to ensure you can place the stop loss beforehand. Another tip traders use for more conservative entries is pending orders instead of market execution.
This approach is a lot more calculated and allows you to double-check even further. In some cases, you might find an opportunity doesn’t quite tick all the boxes. This would permit one to cancel the entry and avoid a potential loss, which is complex with market execution.
Your trading plan should also thoroughly cover what you should be doing when your positions are live in the markets, which is trade management.
You should never micro-manage or interfere unnecessarily with your positions at this stage. Trade management logically secures any open profits or reduces any potential losses.
It starts with what you do after the price has moved in your favor some distance from your entry-level. Typical questions might be whether a trader moves their stop loss to breakeven, somewhere about their entry point, or even a trailing stop.
Some traders may decide to move their stop loss after a certain period (whether tens of minutes, a few hours, or at the end of the trading day) to a particular Fibonacci retracement or a recent high/low.
If you’re using any scaling techniques, you’d need to perform these at pre-determined points on the chart. More importantly, you should have made this decision long before the opportunity arises.
Overall, trade management is about giving your trades the best chance for maximum gains while not being overly involved, which might lead to suddenly closing your positions for no real reason.
Once you’ve entered into any trade, there’s always a 50% chance of closing a trade with a gain or loss. It’s not so much the outcome that matters but whether you’ve given the market enough time to move as far as it could to produce the most profit or invalidate your trading idea.
Just as traders need an entry strategy, you need an exit strategy or maybe a few of these. We can break this down into methodologies for managing losses and profits.
For the former, the simplest is using a fixed stop loss. The key element is never moving the stop to absorb a bigger loss, assuming you have set it properly and at a level that completely nullifies your trading idea as wrong.
Traders can implement several techniques for taking profits, such as using set risk-to-reward ratios, targeting support/resistance levels, Fibonacci areas, defined take-profit levels, trailing stops, scaling out, etc.
Regardless, the trading plan at this stage should be designed for ‘extracting’ the most out of a profitable position after a certain elapsed period. Furthermore, it’s essential to maintain a calm and neutral state where you don’t fret about what could have been and instead look for new opportunities.
We have one more step, and that’s reviewing. This practice is all about accountability by keeping a record of each executed position and performance. Traders achieve this part of trading by journaling.
No trader is perfect, and mistakes can still happen even for the most experienced. A journal is a tool that helps you to foster improvement by fixing a few errors to prevent them from happening in the future.
You can then start the whole trading plan from scratch, knowing you’ve ironed out some issues to make you an even better trader.
Trading has some similarities to being a 100m sprinter. A race only lasts 10 seconds, but a mountain of effort and preparation comes beforehand. Similarly, an order takes about a second to execute in the markets.
Yet, the work involved behind the scenes in making this deceptively simple decision is substantial. The point of this article is to reinforce the importance of planning everything from start to finish.
Any solid trading plan shouldn’t just look for the most optimal entry tweaks and systems but also incorporate all the other elements of being a complete forex trader.