Creating a Trading Plan
Creating a Trading Plan by FxPremiere Forex Signals Site. Using method of the Elite in the Capital Markets.
It is common knowledge that new Forex trader’s fail 80% of the time. This is because many beginners start trading without a clear plan. A premeditated plan is crucial when you trade. Trading without a plan is like going to war without an attack and a defense plan. Before you go into a battle you assess your capability, your strengths, and your weaknesses. The same logic applies to Forex – you prepare a plan that helps you base your trading on your strongest features and avoid the weak ones.
Live Forex Trading Plan
There are many people who claim that they have developed the perfect plan; all you need to do is give them your cash and you will have access to this money making machine. The truth is that no one knows you, your mentality, your capacity, and your strengths and weaknesses better than you. That´s the reason that only you can build the best trading plan for yourself. Building a trading plan includes several steps which we´ll explain one by one below. It is important to keep trading as simply as possible, so the plan shouldn´t be complicated either. As Einstein said – if you understand the problem, you can explain it with simple words.
Available Forex funds
Before you start trading you should decide how much you want to risk on a single trade. The professional retail or institutional trader doesn´t risk more than 2-3% of their account in one trade. I do the same and I suggest that you follow the same rule. It doesn´t matter how small your account is, if you want to be in this business for the long run you should stick to it, the rewards will come eventually.
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Let´s say you start with a very small account of $2,000. You want to risk 3% of your account for every trade; your stop losses are 60 pips and take profit targets 40 pips. So, how do you calculate the lot size? It´s easy, 3% of $2,000 is $60, so you risk $60 for 60 pips. That is $1/pip and since 1 mini lot accounts for around $1/pip, your trades will be 1 mini lot or $10,000. That gives you a 1/5 leverage, which is very reasonable.
Forex Trading Plan
Let´s be conservative and say that you use 1/1.5 profit/loss ratio. At the end of the day, you end up with just one net winning trade. This means that you make 2% profit a day or $40 in real terms, which might not seem like a lot to some. But don´t let that first impression discourage you, that´s 10% profit in a week; therefore your account is 10% bigger.
Trade with a plan
We know that in forex profits increase exponentially, so in the second week you increase the lot size 10%, in the third week to 11%, in the fourth week to 12% and so on. In about 7 weeks, your account will have doubled and in 12 weeks your account will be three times as big as the initial one. By that time, you can alter your money strategy. You can withdraw half of the monthly profits and leave the other half, in order for the account to keep growing.
Time to trade Forex
The next step is to distinguish how much available time you have for trading. Professional traders whose job is trading, don´t stand in front of their screen nonstop. They take 30-minute breaks every 2-3 hours and don´t work more than 8 hour shifts, otherwise judgment becomes impaired and we know that it is of the uttermost importance to keep a clear head when trading. Many people have full-time jobs, so they cannot follow the markets continuously. Even if you´re not working full time, you might have other preoccupations and it´s not advised that you keep staring at the charts for 12-14 hours like a zombie.
Forex Signals trading Plan
You need to know what your trading hours will be, whether it´s 30 minutes around midday, during the afternoon, or throughout the day if you´re not working. The statistics show that nearly 40% of people trade while commuting in the morning or during lunch breaks. The best trading strategy for them would be scalping. Our short term signals here at FxPremiere offer good opportunities for this group of traders.
There are traders who only have time to look at the charts when they get home in the evening. At that time of day the market activity is very low. They have better chances if they trade the bigger timeframe charts, like daily or 4-hour charts. These are swing traders and they can use our long term signals, apart from their own analysis. The other group is the daily traders who have access to charts and markets any time of day. This type of trader can use whatever timeframe they feel most comfortable with and they can follow all our signals as well.
The trading plan is a very important aspect of trading, so we want to elaborate on it thoroughly. Therefore, this article will be nearly twice as long as our other strategies, that´s why we are dividing it into two parts. It will be easier for you to digest the information and build your own plan step by step. We will complete the second part of this article next week, in the meanwhile, get to work on your trading plan.
We presented the readers with some forex trading strategies explaining which was most suitable for each type of forex trader psychology.
It´s not important how many trades you win, but how much you profit when you do
In this article, we will take a look at the next logical step in creating you forex trading plan – applying your trading strategy. This is a very important part of forex trading, if not the most important. One of the most famous quotes from trader George Soros is “It´s not whether you´re right or wrong that´s important, but how much money you make when you’re right and how much you lose when you`re wrong”. These are wise words from a successful forex trader/speculator. He’s a household name in forex.
These words came to my mind as he decided to sell the Australian Dollar against the U.S. Dollar about three years ago when this pair was trading around 1.05. His strategy was fundamental; he predicted a decline in commodity prices and a tightening of monetary policy by the FED. Two years later, AUD/USD found itself about 35 cents lower and rumors were that he made more than a billion USD on that one trade.
As we know, forex strategy is important and it is alright to be wrong sometimes but the most important thing when trading is the implementation of your strategy. If you apply correctly, your wins will be larger and your losses smaller. But, how can you implement your forex strategy in the best way possible? Here are a few tips:
First Step is the Biggest – One of the biggest reasons for losing in forex is hesitating to pull the trigger when your forex strategy indicates that you should open a forex position. If you look at the EUR/USD weekly chart below, the 100 moving average (MA) in green clearly rejects the price at the black arrow. Both the stochastic and the relative strength index (RSI) are overbought and that week´s candle closed as an upside-down hammer, meaning a possible trend reversal was likely to follow.
All of these indicators show that EUR/USD would fall back down. Besides that, the area between 1.15-1.17 provided resistance many times in a one-year period. As you can see, over the next three weeks, the price has moved down about 500 pips. Now that´s a 500 pip loss, and your forex account would have been 500 pips larger if you had taken that trade. On top of that, forex traders tend to chase the price and enter in late when they have missed a good opportunity because they get frustrated, so they end up selling near the bottom or buying near the top. This would obviously result in a loss. So, if you see a perfect setup according to your forex strategy, don´t hesitate too long.
Build a risk-free trade – Risk-free?! How can trading forex be risk-free? Well, a forex trade can´t be risk-free when you open it but it can evolve into a risk-free experience. If we take the EUR/USD example again, imagine you opened a sell forex position at the 100 MA around 1.1610 with a stop above 1.1730 (the high in August the previous year). Now, when the week ended, the price was at 1.14, 200 pips lower and the weekly candle closed as a reverse hammer.
At this time, you´re pretty sure the price will continue lower in the following weeks. You can now move the stop loss at breakeven or even at 1.1510. This means that you would win 100 pips even if the trend reversal scenario didn´t materialize. So, building a risk-free forex position is an important part of your forex strategy. But you should apply it cautiously, you can´t move your stop loss to breakeven once the position is 5-10 pips in profit. You must be patient and wait until the price moves at least 50 pips away from the entry point. Then you can move the stop loss to break even and turn your forex trade into a risk-free position.
Placing Winners – Sometimes, the direction is very clear. Take, for example, the EUR/USD pair. It was pretty clear that the price wouldn´t stretch much further above the 100 MA in green. So, let´s assume you opened a sell forex trade at 1.16. Then, by the end of the day, the price ducked again back below 1.15. At this point, the odds the price will keep moving down are about 80%.
So, what do you do? You open another sell position the same size as the first one. As we can see from the daily chart below, the price moved down in the following days and closed the week at 1.14. By this time, the odds the price will move further down in the coming weeks, increases even more. As we mentioned above, the weekly chart closed as an upside-down hammer and the indicators were overbought. So again, you open another sell position and move the stop loss for every position to breakeven – then you can lock in some profit as the price moves down. As George Soros said, “it is how much you make when the trade goes in your favor garners profit”, so on such occasions when the direction is clear, you make the most of it. Don´t hesitate… just apply this method.
Losing Out – We know that your forex strategy won’t always point in the right direction. Even when all the indicators are pointing in one direction, something might happen in the forex market which changes everything – and your perfect setup turns into a failure. The trick is to recognize the failure and accept the loss. Buy Signals
When you first plan your trade, you pick the take profit levels according to your strategy. When I opened the sell forex trade in EUR/USD near 1.16, I placed the stop loss at 1.1650, about 30 pips above the 100 MA. I did this because the indicator I chose for my strategy was based in this MA. I saw the 100 MA as the line in the sand; once it would let go there would be no other resistance nearby to stop the uptrend. Fortunately, the price went in my direction but if it hadn´t I would accept the 50 pip loss. Some traders keep moving the stop loss further and further away and end up losing their entire account. You can´t hope for miracles to happen in forex and turn a trade in your favor. If your strategy showed a decent stop loss level then stick to it, we can´t win every single trade! Technical Forex Strategies
A forex strategy is very important, you can´t trade forex without a strategy just like you can´t go to war without a plan. But often, implementing your strategy is more important than the strategy itself. In fact, more often than not the strategies work just fine, it´s the forex traders that implement them in the wrong way. So, if you want to be successful in forex you must apply your strategy correctly, respect the stop losses, add to the winning trades, build risk-free positions when possible and, of course, step in when your strategy tells you to do so.