The Importance of Having a Trading Plan

Planning is the first step in every project. Whether you’re wanting to build a house, or whatever project needs to be done, planning is mandatory; and it’s the same with trading. It is ok to want to trade and be involved in financial markets, but if you do this randomly, you’re only going to lose. This is especially valid in the Forex market. High volatility levels and unexpected moves are the name of the game here, and these moves are destined to take out even the most seasoned traders. Algorithmic trading is the reason for these spikes in both volatility and trading activity. Forex brokers are simply intermediaries between retail traders and the interbank market, while the main trading is done by trading algorithms. These robots, or computer programs, are run on super-computers. The more technology advances, the more powerful these super-computers become, and the more influence they’ll continue to have on the Forex market’s price movements. However, there’s something to consider, before just saying that computer trading is ruling the Forex market: These computers are programmed by humans, so the human component, which is always prone to error, is still there. The art of speculation calls for finding the weak spot in a market (in the case of the Forex market, the weak spot in a currency pair) and profiting from that. This may be the result of riding a strong trend, or fading a fake move, or simply scalping your way to financial freedom. After all, this is the purpose of Forex trading for a retail trader: to find the way that leads to financial freedom and independence. This, unfortunately, is easier said than done.

* T&Cs apply to each of the offers. Click “Trade” for more details

The Structure of a Trading Plan

Two things must be considered when trading the Forex market, as they are the pillars of every trading decision and they must come together in a coordinated fashion: technical and fundamental analysis. We’ve dedicated multiple articles to both technical and fundamental analysis, and we’ll continue to do so, because both subjects are vast enough and also ever-changing. For this reason, traders need to be constantly updated with new factors that influence trading. Is a government changing in a part of the world, and you’re trading that currency? That is part of the fundamental analysis that needs to be incorporated. Is a strong support level broken on a monthly timeframe for a currency pair you’re trading? That is part of technical analysis that needs to be incorporated into a trading decision. Contrary to general belief, a trading decision does not only refer to the moment of entry, when a trade is opened. Equally important is the exit moment, when the “trigger” is pulled. In trading, there is a saying: Cut your losses quick and let your profits run; but this is easier said than done. How do you know a loss is too small to cut, and how do you know how and when to let your profits run? Are you willing to let a position stay open over the weekend when numerous things can happen, and the market may turn at the Monday’s opening? These are all part of a trading plan, and the following are steps for developing a sound plan. In this way, the chances of surviving in this market are significantly increased.

Stop Treating Trading as a Hobby.

This is the starting point to everything trading-related. The mindset is so important that it has the tendency to overcome everything else. If you treat trading as a hobby, you don’t really care whether you lose or win, or whether the account is growing or not, and you’ll treat things with less passion and intensity. Make no mistake, trading is not a video game. These are real people with real money, and the ups and downs a currency pair makes in a day are part of a process that can wipe out a trading account in the blink of an eye. To stop treating it as a hobby, one needs to dedicate time to studying why markets move. Understanding the principles is easy, and this Trading Academy is helpful in numerous ways. So, the first step in developing a sound trading plan is to stop treating trading as a hobby, and look at it as another means to an end: making money! This is what trading is: speculating on the movements of a financial product.

It all Starts Over the Weekend.

Over the weekend the markets are closed, and there is no more perfect time to start planning the next trading week than this one. Take your time, have a cup of coffee, and draw up a small trading plan. The first step to trading success is to limit the time horizon for your trading expectations. Look at a week as being good enough for a profit to be made. Ideally, at the next Friday’s closing, all positions should be closed, and the account should be flat over the next weekend. Unfortunately, Friday is one of the most important trading days in a trading week, if not the most important one, and Friday’s evening trading offers plenty of opportunities for a good positioning for the next week’s trading. Again, ideally, the trading account should be flat, so that unexpected events that could happen over the weekend are avoided.

Fundamental Analysis

Open any economic calendar available; there are multiple ones offered for free and they can be easily found with a simple Internet search. Look for the red events, which are the most important ones in the week to come.

Write down the days and the time during the trading days when these events are about to be released. Look at the expected impact and values, and the previous trend, as this data is available ahead of the actual releases. Chose the currencies/currency pairs you want to trade based on the importance of the economic events about to be released. You may want to avoid some, or to change the currency pairs to skip some releases. For example, if it is a European Central Bank interest rate decision that week, trading euro might be dangerous, so you might focus on the USD/CAD pair. This way, you are mitigating the risk of being caught on a vicious move on the wrong side of the market.

Technical Analysis

You should find a technical analysis approach that suits your personality, and use it to analyse various currency pairs; not all the currency pairs, as that is not possible, but some of them. Around 10 currency pairs are recommended. You can use either divergence between price and oscillators, or a trading theory, etc., but should stick to the same approach for all currency pairs. Pick the one/ones that are most likely to move according to your analysis, and the fundamental events that were identified by the previous point. In this way, you’re using both fundamental and technical analysis in your trading decision, just the way it should be!

Trading Size

Risk only a specific amount on that week, and then divide that amount among the currency pairs you plan to trade. This can be either a fixed amount or a percentage of the trading account.

Trade Your Plan!

If you have bothered to plan, now simply trade your plan as the week starts!


Recommended Further Reading

Other Educational Materials