If you have been reading either forex books or attending forex courses online and offline, you will have heard about something called “Forex Trading Plan”.
So What Exactly Is Forex Trading Plan?
It is also sometime known as forex strategy by some traders. A forex trading plan is a predefine sets of conditions that you have setup to tell you exactly when to enter a trade, when to exit a trade and how many lots should you enter.
Why It Is So Important To Have a Forex Trading Plan?
Without a proper trading plan, a currency trader is simply a gambler. He is betting on a 50-50 trade thinking that a trade is either up or down. However he has forgotten that he could be stopped out when the price is moving sideways making the trade not a 50-50 trade.
If you are trading with a properly tested forex trading plan, you will have increased your odds of winning to at least 70%. The reason why you can increase the odds is because you will have tested the trading plan on a demo account for a while before you trade it on a LIVE account.
How To Setup a Forex Trading Plan?
Step 1: Decide on the type of trades you are interested in, Example: Breakout, Range or Swing trading. Once you have picked your interested trade, you can then setup the conditions. (I am not saying that you cannot trade more than one type of trading methods, you can also do the same steps for any type of trading methods you prefer)
Step 2: For the type of trading system you have chosen, you can then decide on the type of forex indicators to use. I would suggest the use of some lagging indicators and some leading indicators as it can provide you with more coverage.
Step 3: Go to your trading charts and squeeze your chart to show more data and then do a chart analysis for your chosen trading system. You can then write down what you see when the trading system that you want is happening like the behaviour of the indicators, the sudden movement of price or is that any breach of trend line. In short, you should look for some patterns, recurring patterns.
Step 4: Go through what you have recorded in Step 3 and then do a check for similar patterns and that will be the conditions where your chosen trading system will occur.
Step 5: Try the initial trading plan you have setup on a DEMO account for about three to six months and you should tool up a trading journal to record down what you see during the DEMO practice trading so that you can fine tune the trading plan to improve the accuracy of your strategy.
Step 6: If your forex trading plan achieves an accuracy of more than 60%, you can then move on to trade it on a LIVE account. If it does not win at least 6 out of 10 trades, you should then fine tune it until it works.
Some of you may think that “How can I make money if it only helps me to win 6 out of every 10 trades? It means that I lost 4 trades for every 10 trades.” It has got to do with your risk reward ratio and I will post another article that discuss on this area the next time.
If you are interested in scalping the forex market, click on the link to know more about forex scalping strategy