Planning is the first step to every project. Either wanting to build a house, or whatever a project needs to be done, planning is mandatory. The same with trading. It is ok to want to trade and be involved in financial markets, but if you do this randomly, you’ll have only to lose. This is especially valid in the Forex market. High volatility levels and unexpected moves are the names of the game here, and these moves are destined to take out even the seasoned traders. Algorithmic trading is the reason of these spikes in both volatility and trading activity. Forex brokers are simple intermediaries between retail traders and the interbank market, while the main trading is made by trading algorithms. These robots, or computer programs, are running on super-computers. The more technology advances, the more powerful these super-computers become and the more influence they’ll have on the Forex market price movements. However, there’s a thing to consider, before saying that computers trading is ruling the Forex market: these computers are programmed by humans, so the human component, that leads 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 profit from that. This may be the result of riding a strong trend, or fading a fake move or simply scalping your way out of 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 more easy to be said than done.
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Trading Plan’s Structure
Two things must be considered when trading the Forex market. These two things 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 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 in a trading decision. Contrary to the general belief, a trading decision is not referring only to the entering moment, when a trade is open. Equally important is the exit moment, when to pull the trigger. In trading, there is a saying: cut your losses quick and let your profits run. This is easier to be said than done. How do you know a loss is too small to cut it and how do you know how and when to let your profits run? Are you willing to let a position 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 to develop a sound plan. This way, the chances to survive in this market are increasing significantly.
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 care if you lose or win, if 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 the trading account in a blink of an eye. To stop treating it as a hobby, one needs to dedicate time to study why markets are moving. Understanding the principles is easy, and this Trading Academy is helpful in multiple 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 markets are closed, and there is no other perfect moment to start planning the next trading week than this one. Take your time, have a cup of coffee and make a small trading plan. The first thing to trading success is to limit the time horizon for your trading expectations. Look at a week to be 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 is offering plenty of opportunities for a good positioning for the next week’s trading. Again, ideally, the trading account should be flat. This way, 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 or 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 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 USDCAD pair. This way, you are mitigating the risk of being caught on a vicious move on the wrong side of the market.
Technical Analysis
Find a technical analysis approach that suits your personality and use it to analyze various currency pairs. Not all the currency pairs, as that is not possible, but some of them. Around ten currency pairs are recommended. Use either divergence between price and oscillators, or a trading theory, etc., but stick to the same approach for all currency pairs. Pick the one/ones that are most likely to move per your analysis and the fundamental events that were identified by the previous point. This way, you’re using both fundamental and trading analysis in your trading decision, as 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 bothered to plan, simply trade your plan as the week starts!
Recommended Further Readings
- What are “Lots” in Forex Trading
– Explaining the concept of a lot of Forex trading, and from that heading to micro-lots, different trading accounts, and broker’s limitations. - Volume and Slippage – Value of a Pip and Execution Types
– Execution is important to every Forex trading and this article deals with the difficulties to trade big volumes with little or n- slippage. - Basic Trading Styles – At Market or with Pending Orders
– Showing the possibilities a trader has, explaining the advantages and disadvantages of trading at the market or with pending orders. - Pending Orders Explained
– Different types of pending orders, how to set them, where to find them on the MetaTrader platform, and much more. - Forex Market Participants
– Who is participating in the Forex market, its structure, componence, and implications of different groups. - Trading on a Demo Account
– Explaining why trading on a demo account before going on a live one is mandatory for any serious trader. - Types of Forex Charts
– How many types of Forex charts exist, how to interpret them, advantages and disadvantages of each type, etc.
Other Educational Materials
- Mastering the trade: Proven techniques for profiting from intraday and swing trading setups. Carter, John F. American Media International, 2007.
- “FOREX trading strategies and the efficiency of sterilized intervention.” Kubelec, Christopher. Department of Economics (mimeo), University of Warwick (2004).
