How to create a forex trading plan

To reach success in trading, as in anything else, you need a plan.

A trading plan is your map that guides you from where you are to where you need to go.

Forex Trading Tips is a website for novice or amateur traders who are at the beginning of their journey on the road to forex trading success. The trading plan you create, should be a map that guides you from beginner trader to sustained trader.

A forex trading plan is a written checklist that you use to confirm that you are still on the right path to your destination. With every step, every decision you make about a trade, you need to check whether you are still on the path that leads to your destination.

Just as with a map, when you deviate from the route that you plotted, it will lead you to a different destination. If you were travelling somewhere and at every turn-off you took a different direction from what you planned, you will expect to end up at a different destination from what you initially chose.

A trading plan ensures you don't get sidelined by unplanned roads that look inviting, but probably lead somewhere else from where you want to go.

What does a forex trading plan contain?

A trading plan contains written guidelines of what a trader will look for and how the trader will act when trading.

It should at least contain

  • the reason why you trade;
  • the time frame you will trade;
  • what times you will trade;
  • what the trading edge is that you look for;
  • your risk management strategy;
  • your profit taking strategy;

A trading system or trading strategy is part of your trading plan.

It took me, as a novice part-time trader, less than 10 demo trades to realise that I needed a trading plan, and that my trading plan should include the main aim I would strive for in my trading.

And that my main aim should not be to make money.

When you say something like "your main aim in trading is not to make money", people immediately lose interest and start looking for advice that suit there view of what the world should be like to accommodate them. They usually end up with a collection of videos of the guys with the shiny cars and large houses who tell you that trading is easy, especially when you put no effort in.

My aha-moment came courtesy of Mark Douglas. Yours can come from anywhere, although it usually comes after the wannabe trader has lost his first, or subsequent, trading accounts.

A trading plan puts you in a position where you can grow your trading account without concentrating on making money.

It allows you to plan in advance and to predetermine what you are looking for before you will enter a trade.

It removes emotion from your trading, because you make your decisions uninfluenced by the circumstances that prevail while you are trading. It protects you from being an emotional trader who chases after perceived opportunities on the spur of the moment, only to find out later that you missed an important piece of information that could have saved you from a losing trade.

When you have a trading plan that dictates how you act and react, it forces you to become a patient trader. Gazillions of daily trades become losing trades because traders enter too early. Impatience leads to traders thinking they know what the market is going to do in the future, while they don't even know what will happen in the next minute.

You can choose your own reason for trading, but I believe the most profitable reason why you trade is "to successfully, and without exception, follow my trading plan".

The money will follow.

Some traders like to put their trading plan next to their trading screen or somewhere where they can see it every day. The problem with seeing it every day, is that it becomes like a family photo on the passage wall. After a week, nobody notices it any more.

If you need reminders, just put up a note that reads: "Did I check my trading plan?".

It is good practice to save a screen-shot of your trades so you may revisit them and see what went wrong or right. This is usually saved in your trading journal.