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The trader who wakes up to the market without knowing what they will do during the trading day is bound to lose. When you wake up in the morning to go to work ,you already have plan for the day .For example you know that you will take route 3 to get to work but if there’s too much traffic on route 3 ,you have a list of other routes to take in order for you to get to work on time. Included of course is the time aspect as you know how long it takes you to get to work etc. It is no different for the forex trader. A good trader will have prepared for what the market has to offer before it opens.

What is a Trading Plan?

A trading plan is a guide that a trader uses to concentrate on consistently making high probability trades. It is essential that a trading plan is custom built. A trading plan should not be confused with a trading system. A trading system is part and parcel of a trading plan. However a trading plan includes a money management system .For example

1. “Buy when the rsi is below 20” is a trading system

2.“Buy 2 lots when the rsi is below 20 and exit one lot at 30 pips and follow the rest with a 30 pips trailing stop .Exit at 60 pips or at end of day” is a trading plan.

Note that the second has a trading strategy, a money management plan, and a position size.

A trading plan will consist of trading strategies you have tested and are comfortable that give high probability trading opportunities. The trading strategy will generate buy and sell signals. The second part is the money management aspect which will help you in trade exits, position sizing, and general risk levels.

Making a Forex Trading Plan

There is no shortcut in creating a trading plan. It must be written down and will probably be the most time consuming effort that a forex trader will have to deal with. A lot of traders do not write down their trading plan and keep on wondering why they are not consistent in their trading. Constantly reviewing the trading plan is also essential in order to improve in your trading.

Some of the questions that you may need to ask yourself when making the trading plan are

• What type of system will you use? – Ensure you have tested this to your satisfaction.
• What pairs will you trade? – Understand that in forex, since most pairs are complementary, it makes no sense to trade like trending pairs. For example I have never understood why traders trade both the euro and the pound .It only increases risk but do little in increasing reward.
• How much will you risk? You can use the forex lot calculator to guide you in this.
• How much can you lose? Understand that it is one of the things that will happen as you trade. You must be ready to take some loses.
• How much do you reasonably expect to make, per trade, per week, per month? Based on your account size, system risk reward and lot size you should be able to determine reasonable trading expectations.
• The possibility of unexpected variables. I know it doesn’t look likely but one day as you continue trading, you will get a sudden 300 pip move. As luck will have it you will probably not have a stop or your forex broker will not honor the stop. Are you prepared for that? How will you prevent yourself from losing all the money?
• What is your holding time? How long do you give your trading system to work before you know it might not be an optimum trade? A lot of traders are in the habit of not knowing how long their system is likely to be accurate. Exit strategies must contain holding time. It can be number of bars etc.
• How many trades will you make per day, per pair, per week? Remember that the more trades you make the higher your cost and also the more you are risking. It is very important to know when to call it quits in a day. Normally if you have already done 3 trades and none have gone anywhere, it is a good idea to come back the next day. However this all depends on your own custom built trading plan.

A trading plan is the most important gift a trader can give himself. By having a plan that generates ideas you will have good reason to be in a trade and will reduce the risk of making emotional trades not based on high probability trade setups. So go ahead and start writing your own trading plan.

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