Five Steps to Developing a Forex Trading Plan

Removing emotions from trading Forex, tends to be the single hardest step to make, in Forex trading. When you have a trade that goes well, you feel like you are in control of the markets and often jump right back in without the proper analysis. But have a losing trade and you will feel defeated and mad- you will want to take revenge on the markets, causing you to make further bad decisions. Putting together a written trading plan that provides you with the exact steps you must follow removes these emotions and reduces the psychological responses to losses and the euphoria of wins that can lead to bad decisions and lost money.

Your trading plan must be able to be seen. When you write in your trading journal, as you should, you may never go back to that page again because you already know that information. However, you must write you plan and place it so that it is easily seen at all time. This makes it possible for you to actually use it every time you place a trade and not just know that it is around somewhere. Every day that you sit down to trade Forex read your plan immediately upon beginning and then before placing any trade and then immediately after closing a position.

The first component is a defined entry strategy. It must be easily defined by looking at a chart or meet the fundamental rules you have in place. Whatever it is, you must be able to see it immediately. This only comes from practicing and knowing your system inside and out. The ability to choose only quality entry points must be imprinted on your mind before when looking at charts.

Money management comes into play as the second part of your plan. You must know the risk/reward ration of any potential trade, knowing what you can expect to make as well as what you might lose. Sizing your trades and placing your stops is important at this time.

Make sure that you trade based on stop/loss placement and proper profit taking points. You should trade with a least a 2:1 ratio of profit to loss. For example, if you have 10 pip stop in place your profit target should be a minimum of 20 pips. Do not overset your profit target as this becomes greedy and is an emotional response.
Plan your exit strategy based on your risk/reward scenario and stick to it. This allows you to be objective about your trades.

Cool your jets after a trade. Regardless of whether a trade results in a profit or a loss, the most vulnerable time is immediately after a trade. Winners make you feel invincible and losers make you mad and chase revenge. Both are losing attitudes.

In conclusion, setting up a trading plan is imperative for Forex traders to succeed. There are no hard and fast rules for trading currency, but by applying these 5 trading components to your trading plan you have a much better chance of succeeding than at any other time.

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