Benjamin Franklin said, "By failing to prepare, you are preparing to fail." This quote is particularly true when it comes to the money world. To succeed in the forex market, one must set the right goals and develop a holistic roadmap to reach those goals. Doing so requires not only time but also a great deal of knowledge and discipline. To make this journey easier for you, we have gathered a few important recommendations on how to build a good forex investment plan.
To succeed in the forex market, one has to set goals and develop a holistic plan to reach those goals.
What is a Forex Trading Plan?
A plan can be defined as a structured set of steps with deadlines designed to achieve an objective. And there is not much of a difference between a forex trading guide and any other scheme of actions, except that it is primarily aimed at profiting from trading currencies. A good plan has to answer the questions what, when, and how. So while drawing your personal trading guide, don’t forget to ask yourself the following questions. What do I want to achieve? When do I need a certain thing to be done? And, finally, how do I get where I want to be?
Why do you Need a Plan?
If you are still unsure whether you need to spend time on preparation for your trading activities, we hope these 9 arguments will convince you:
- A plan simplifies trading from both practical and psychological points of view. It is more difficult to succumb to irrational impulses and make a mistake when you have a guide at hand.
- Preparation helps predict challenges that may get in the way and subsequently develop solutions before these challenges come up. A well-drafted action scheme urges you to think, "What will I do if this or that happens?"
- There is no goal without deadlines. A well-organized plan not only helps formulate where you want to get but also determines the timeframes for each step of the way.
- If you fail while having your strategy written down, it’s much easier to analyze your mistakes and make corrections. If you don’t have one, it will be hard to get to the root of the problem.
- It is also much easier to evaluate your performance based on your plan. Given a list of what you have done, you can say what has been done well and what could have been done better.
- Planning helps to build self-discipline and make fewer mistakes. People who neglect the preparation stage tend to be less organized and less assertive when trying to achieve something.
- The planning process urges people to think outside the box and generate new ideas. Thinking ahead of time requires creativity. So looking for an answer to the "how" question may bring you to innovative ideas.
- Having a well-designed strategy puts you in a position where any mistake can be corrected easily and with minimum loss. Even if you stumble, you will get up quicker than those without a plan.
- And finally, this might sound too obvious, but we will mention it just in case: if you adhere to a good strategy, the chances of failure reduce greatly.
Trading Plan Guide
First of all, a plan must be written down. If you only have your guide in the form of an abstract idea, it is almost as bad as not having it at all. So, create a file on your computer where you keep your trading scheme.
There are a few important elements you must include in your plan. The most important one is your goal. Remember, the first question you need to ask yourself is, "What do I want to achieve?" The answer to this question will serve you as a source of motivation and help you stay on the right track.
Second, you should specify the size of your investment and the risk you are willing to take proportionally to your funds. Let’s say you set it at 2% of your investment. So if you trade $1000, the worst-case scenario for you is losing $20.
Another important thing to include in a trading plan is analysis tools. It would help if you thought in advance about how you will analyze trading signals and what technical indicators you will use. Holistic market analysis will help you limit losses or predict price action.
You should also include entry and exit signals. It’s a bad idea to enter and exit trades randomly. If you don’t predict the situation upon which you need to enter and exit a trade, you are likely to lose or at least get less profit than you would if you had your planning done.
Not of less importance is determining stop-loss and take-profit levels. These settings will prevent you from extra losses and allow you to benefit from your trades in a greater way.
"A good plan executed today is better than a great plan executed tomorrow." George S. Patton
Trading Plan Tips
- Write down your plan so it doesn’t seem too abstract and it is easy to review and follow.
- Keep your goals clear and realistic as it is nothing but frustration in failing to reach the unreachable.
- A plan cannot be static. Even the most predictable market conditions can’t guarantee that your approaches will not require amendments according to the market environment. Always review and adjust your guide in accordance with the market.
- Determine what points of your strategy should not be changed under any conditions. Although the market is volatile and you have to adjust to it, there must be a key strategy that won’t change whatsoever.
- "A good plan executed today is better than a great plan executed tomorrow." General Patton said. If you feel like you’ve been working on your strategy for too long and it is still too far from perfection, stop doing it and test what you have. Try it on a smaller investment if you are unsure. Don’t use your endless preparation process as a procrastination excuse.
- Look for an example of a trading plan but don’t copy others. Even if they say it works for them, it doesn’t mean it will work for you. Good preparation is based on your personal goals, not on anybody else’s. So the best you can do is look at trading plan examples critically, filtering what you could use yourself but not repeating the whole thing blindly.
- Analyze your performance. Put down the bottom line at the end of every trading day. If the result is worse than expected, ask yourself what you could have done better.
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Statistically speaking, a minority of people who trade forex have a plan. Even those who have it often fail to follow it. This is why many people lose money, and this is why the currency market is still in disgrace in many societies. On the other hand, traders who do succeed say it is due to a well-developed trading guide.
A good plan exists in a written form with clearly defined goals and objectives as well as the deadline for every step of the way. It can and should be adjusted to the current situation in the market. Following an elaborate roadmap will save you from many trading mistakes and bring you to a higher income.