How to Formulate Your Trading Plan

There are many different types of traders. There are those who hope to make regular small profits and those who aim to score one big investment. Some traders prefer to monitor the markets all day long, while others prefer to dip in and out for intensive sessions. Some are repulsed by risk, while others have a hefty risk appetite. Whatever a trader’s preferences, they should all have one thing in common: a well-formulated plan to steer them through the forex markets.

Why do traders need to make a plan?

Forex markets move quickly and are frequently volatile – that’s what makes them so appealing to traders. However, because of this, nothing is ever constant. Despite the overwhelming number of strategies, charts, and graphs available to a trader for use in technical analysis, there is always the possibility that the markets will suddenly, and unexpectedly, change. You could be sure that you made a winning market move in one moment, and then receive an entirely different outcome the next. Prices can even move in the time between an order is placed and its execution.

If only there was a way to prepare for unexpected shifts in the markets, and ensure that you make calculated decisions, even during periods of volatility! A thoroughly thought-out trading plan keeps traders on-track as they navigate the often-hectic forex markets.

How do traders formulate a plan?

When it comes to making your trading plan, there are no set parameters. A plan can be as detailed or sparse as you want it to be and should be tailored to how you approach the markets. However, there are a couple of components which contribute to the formulation of a good trading plan:

1. Money management

During every step of your trading process, it’s important to know your capital. How much do you have, and how much of it are you using in this particular trade? Before diving into the markets, you should plan out exactly how much you intend to use in a trade. Setting limits for yourself means you’re not likely to lose all your capital on a trade that turned out to be an unfortunate decision.

2. Picking a strategy

The Bollinger Band Bounce Trade, the Bladerunner Trade, the London Hammer Trade – the list of trading strategies can seem endless. In the swarm of strategies, indicators, and signals it can be difficult to pinpoint which approach is right for you. One of the best ways to find out is to try out a few different approaches and discover which suits your trading style best. After a period of trial and error, you can then decide which strategy – or combination of strategies – will make it into your final trading plan.

3. Preparing for the unexpected

Before you enter a trade, you should prepare for multiple outcomes. If your position is strong and is poised to become even stronger, when will you pull out? What will you do if your trade suddenly starts to experience loss? How will you adapt if the fundamentals suddenly change? Trading conditions change frequently: make your plan A, but always have plan B, C and D lined up in case something unexpected happens. Considering a range of potential outcomes means that you can consult your plan and act quickly when you need to.

Sticking to your plan

Once you’ve constructed your plan, the hardest part is yet to come. Many traders formulate an excellent plan, only to rely solely on their gut instincts when they trade. During an emergency situation, you could start to lose money very quickly, and it’s easy to let your emotions sway your decisions when you’re in the heat of the forex markets. An unexpected shift in the trend may lead you to feel particularly optimistic about a position which goes against your well-thought-out plan.

A trader’s gut instinct is usually a difficult feeling to quell. However, it’s always worth bearing in mind that your gut instincts in an emergency are frequently based on panic, whereas your trading plan was made with a cool, collected mindset.

Behind most successful traders is a strategic trading plan. Once yours is complete, you can take on the markets knowing that you’re equipped for everything it may throw at you. Happy trading!

Disclaimer: This written/visual material is comprised of personal opinions and ideas. The content should not be construed as containing any type of investment advice and/or a solicitation for any transactions. It does not imply an obligation to purchase investment services, nor does it guarantee or predict future performance. FXTM, its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness of any information or data made available and assume no liability for any loss arising from any investment based on the same.

Risk Warning: There is a high level of risk involved with trading leveraged products such as forex and CFDs. You should not risk more than you can afford to lose, it is possible that you may lose more than your initial investment. You should not trade unless you fully understand the true extent of your exposure to the risk of loss. When trading, you must always take into consideration your level of experience. If the risks involved seem unclear to you, please seek independent financial advice.