Trading currencies in the Forex market without a well-thought plan is like going to war without any direction or appropriate tools. It’s suicide.
What is a trading plan?
A trading plan is like a set of a to-do list. It details the steps you need to follow when entering and exiting trades. Some of the variables in a trading plan include financial goals, risk management, and entry and exit techniques.
A concrete trading plan allows you to discover what your goals are, and how to achieve them. Moreover, planning ahead helps you to make well-informed decisions and avoid pitfalls such as overtrading or letting your emotions run your trading.
How to build a trading plan?
Set Risk Level
How much are you willing to risk per trade or day? Seasoned traders and investors recommend that traders, especially the new ones, should strictly follow the 1-2% per trade rule. That means if you have $1,000 in your account, you only risk up to 2% of it which is equivalent to 20 USD. Once this target is hit, you get out of the market.
Entry Points
A good trading plan includes a clear picture of where you’re looking to enter a trade and how you’re going to enter that trade. But this doesn’t mean that you should jump straight in. You have to wait for a good entry trigger with a good potential trade area. Once you are sure it’s safe, go ahead and enter.
Exit Points
Let’s say you have successfully entered a trade. Now you have to worry about the other end of the trade. How are you going to exit? In some cases, beginners tend to exit trades too early, missing the full profit they could have achieved, or close winning trades and lose out because they were impatient.
Proper placement of stop loss plays a crucial role in your trading. Before you jump into the market, make sure that you put your stop loss at the appropriate place where your trade has enough room to breathe.
Do Your Homework
Staying on the loop on what’s happening around the globe is just common practice traders do. An economic calendar, which features various economic events and releases, should help you get a better overview of what moves the market. This will help you to decide whether you want to trade ahead of an important report or release.
