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Why you should follow a forex trading plan?

trading plan

A forex trading plan might seem a bit of a let down when it comes to trading. After all, it takes a lot of time and is a bit boring comparing to actual trading. Interestingly though, many new traders tend to not have a trading plan at all.

Some mistake this as having a trading strategy. But there is quite a bit of a difference between a trading plan and a trading strategy. A trading strategy is a means of helping you to trade in the markets. On the other hand, a trading plan acts a guide in navigating the markets.

Disciplined traders always have a trading plan before they enter the market. This is because of a number of reasons. The first being that, following a trading plan helps to remove the emotions from the markets.

Secondly, a trading plan can give you insights into the markets and also keeps you out from overtrading. Finally, a trading plan also encompasses money management aspect as well.

Thus, when you follow the trading plan fully, you will be able to raise your profits and make them more consistent.

If by now, you are asking the question about where to start with, then the next section gives you some insights to help you get started with building a trading plan.

How to build a trading plan?

A trading plan is basically like a map. It should tell you where you are going and what to do if your trades take a loss. Thus, the first step in building a trading plan starts with having an understanding of the markets.

In other words, you need to feel the pulse of the markets and build a plan around it.

A good time to prepare a trading plan is after the markets are closed or when liquidity is thin. This could mean, planning after the U.S. trading session closes. You could also have a trading plan that you can focus on, over the weekends.

This helps to keep the distraction at bay and also gives you ample time to study the markets.

A trading plan needs to comprise of two things.

  1. Understanding the market landscape
  2. Preparing your plan of action

In the first part, you will need to study the fundamentals of the markets. This gives you an idea of what is happening in the markets and what is going to happen over the course of the week.

While the former can be done by reading on the key events that took place over the past week, the latter can be achieved by looking at the economic calendar. An economic calendar gives you insights into the line up of scheduled events that will take place over the week.

Once you have an understanding of the pulse of the markets, the next step is to narrow down on the instruments that you want to trade. For example, it doesn’t make sense to trade all USD pairs just because of a big release that is going to come in the week ahead.

On the contrary, you should focus on just a few currency pairs or instruments.

One of the factors that will determine this is by involving money or risk management. With money management, you should first figure out how much you can afford to risk from within your trading capital.

Remember that you should not risk more than 1% of your capital. This will now give you a rough estimate on how many lots you can trade. Based on this, you can then focus on which instruments have the highest probability.

This is achieved by going through the instruments that you have narrowed down. Once you have this in place, you can further filter the currency pairs by means of the total lots that you can trade.

By now, you would have a fair idea of how many currency pairs you can trade and the total lots.

Finally bring in your trading system into the picture which will give you an estimate of the potential profit or loss you can make on the trade.

At the end, your trading plan will have alerted you to:

  1. The main currency pairs to focus on, based on the fundamentals
  2. The amount of lots you can trade in the week ahead
  3. The expected or theoretical profit and loss that for the trades that you will take

As you can see from the above, a trading plan is a great way to become a more disciplined and an informed trader. While it might seem difficult at first, by practice you will be able to make this a second nature before you start trading.

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