Let your winners run is profit maximizing advice for a forex trader, but instead, traders tend to exit trades too early due to a human fallacy called loss aversion. Traders fall into this mental trap because, psychologically, a loss is twice as powerful as a gain. When a loss does occur in forex trading—say a price breakout quickly reverses—owing to another mental trap called recency bias, you are likely to avoid the trade setup that caused recent losses. Over a dozen such biases can affect trading performance. Alas, if we could only take the human out of trade decisions.
Automated trading is gaining in popularity because it takes the human out of trading decisions. Traders have another option—a forex trading plan. Most trading mistakes are caused by a lack of discipline. A trading plan will instil discipline in your trading by establishing rules for trading.
What Is a Forex Trading Plan?
A forex trading plan is your strategy for when and how to enter and exit trades. Imagine you are a basketball player with no strategy for setting up a winning shot. As you dribble the ball, the other players block you, so you instinctively choose to reverse direction. If you had analyzed the players’ positions and likelihood of moving in A or B direction, you could have found the likeliest breakaway to sink the ball.
Forex trading is very much like basketball. You need a strategy based on historical trading performance to increase your odds of a trade running up a profit for you. Recording your trading performance in a trading journal, which could include an Excel spreadsheet, will supply you with the performance data. Also consider recording your emotions associated with trading mistakes and successes in your journal. Review five things you must have in your trading journal. When used together, a trading plan and journal can keep you in control of the market.
Steps to Creating a Forex Trading Plan
- Start by establishing your trading strategies, whether you are engaged in fundamental forex trading such as a news event (e.g., a central bank interest rate rise) or a technical trading pattern (e.g., a Fibonacci Pricing pattern).
- Gather your trading performance data. Ideally, this information has been collected in yours excel spreadsheets and/or journal. This data should inform your rules of trade.
You are now ready to develop your trading rules.
- Establish your trading frequency. Are you a day trader entering multiple trades a day? Do you make one trade a day? Determine your average trading frequency per day, per week, or per month.
- Set your trade limitation. You are a day trader who makes 10 trades a day, of which 5 are profitable. Multiply 5 by 1.2 to get your trade limitation of 6.
- Establish your entry and exit signals. Traders are most likely to follow their gut, intuition, when entering and exiting a market. When market prices are rising, FOMO (fear of missing out) is high. When you follow the trend without a trading plan, you are more likely to enter at the top and exit at the bottom.
- Set your take profit. How many points you take before exiting a winning trade should be established by your trading history. Analyze the trades in your journal.
- Set your stop loss. The stop loss order limits your downside by selling a security at your predefined price.
Benefits of a Forex Trading Plan
When traders are stressed, they make more mistakes. Stress is correlated with the level of risk taken. Lowering the numbers of trades and focusing on applying your proven trading rules will increase your confidence.
When money is at stake, emotion can easily rule your trading decisions. In fast-moving forex markets, it is easy to enter or exit a trade too soon or too late. Or you may simply lack patience. It can take a long time for the right trading conditions to arrive, so you can enter or exit your trade. Rather than dribbling in circles, you can now patiently wait out your forex trading strategy even when market volatility is high.
As you record the performance data in your journal, you should also update your trading plan to reflect new data. With your trusty trading plan instilling discipline, you are less likely to act impulsively, unless all criteria of your trading set up have been met.
Forex Brokers That Support Trading Plans
When choosing the best forex broker for you, ensure their forex trading tools support your trading plan. A regulated broker that provides daily analysis such as TradeFW will ensure your trading plan and journal reflect your recent trading performance. TradeFW also offers educational support and forex training to help you develop and maintain a trading plan.
Once your trading plan is established, you have the option of automating it. To keep up with fast moving forex markets, more FX traders are using EAs and other trading bots offered by the best forex brokers. Your trading rules can easily be input into an expert advisor (EA). The best brokers for beginners will offer EAs that any trader can program.