Putting together a trading plan for your forex trading strategy

Forex trading is a business

If you really want to succeed at forex trading you MUST treat it like a business. Most traders don’t do this, which is also the same reason why most traders lose most or all of their money in the markets. Trading is a business, and you are the accountant, you must constantly monitor your business decisions and have a defined trading business plan that gives you a guide for any possible scenario that may come up. The reason this is so important is because to succeed in any business, trading included, you cannot let your emotions influence how you react, you must be ice-cold and not let greed or fear affect how you operate your forex trading business, because if you do you will surely lose large sums of money faster than you think.

Since you are the accountant and the only person you have to be accountable to when trading forex is yourself, you must define your trading strategy and all other trading parameters BEFORE you actually enter any trades. Since objectivity and ice-cold decision making is the way to forex success, it is critical that you define your forex trading plan before becoming emotional or clouded by entering a live trade. You will never be more objective about your trading business than when you are NOT in the market, therefore, making ALL of your trading decisions at THIS time gives you the best chance at becoming a professional trader.

Factors to include in your trading plan:

• Define your forex trading entry strategy

• Define your forex trading exit strategy

• Define how much of your account you are willing to lose any one trade (define your risk). You may want to also define how much of your account you are willing to lose in any given day/week/month/year, and then quit trading for a period of time if this amount gets hit.

• Define what you will do AFTER a trade is closed out. Whether you have made or lost money on a trade, you need to know what you are going to do immediately after the trade is over because typically it is at THIS time traders do serious damage to their trading accounts by mindlessly jumping back into the market. Typically the best action is to not look at your charts for at least 24 hours after any trade.

• Define what times of day you will analyze the market for trading signals. Don’t attempt to trade when you are sick, low on sleep, or otherwise under the weather. Trading successfully requires a sharp mind; there are plenty of opportunities each week in the forex market so there is no need to force a trade ever.

These are just a few of the more concrete factors that every trading plan should have. Obviously there are many subjective things that a person could incorporate into his or her trading plan, therefore, it will be up to you to tweak and add to the above factors as needed. But the example above is a good starting point.

Chapter 5:  Money management and risk reward