Trading in the forex market can be very rewarding for anyone ready to take some risk and put in some effort to learn the intricacies of currency trading. Before you invest your money, you need to invest your time in studying trading concepts and developing the key skills that are essential for navigating the volatile forex market. However, it would be hard to succeed in forex without a plan that clearly states all the steps that you would take to move forward in your trading journey. This is what we call a trading plan and every beginner needs to come up with a plan that they can follow for trading with ease.
In this article, you will learn everything about the significance of a trading plan and how it helps you to succeed as a forex trader.
Purpose And Meaning Of A Trading Plan
Trading in any financial market is done to make money from the price fluctuations that happen in different assets or trading instruments. In the case of the forex market, international currencies will be used as trading instruments and you will be anticipating the changes in prices of the currency pair that you choose for trading. Your profit or loss from a trade is directly related to the value appreciation or depreciation of a currency.
Since currency conversion rates are influenced by a lot of factors, you can not predict price movements without in-depth analysis. To know the real time price of one currency in another, you can use a currency converter, which provides live exchange rates to help you plan your trades better.
But what type of analysis you will be doing to understand the market situation and what kind of trading opportunities you will be watching out for while monitoring the market have to be decided in advance. There are many more aspects that you need to consider and calculate before executing trades that bring desired results. All of these will be clearly stated in a trading plan and this action plan will make your trading journey easier by giving you a sense of direction. There are a lot of important decisions that you need to make before devising your trading plan.
The amount of money you will need for use as trading capital, the trading style you would follow, the amount of leverage you will utilise for optimising profits and also the trade size and margin requirement need to be fixed before you get into trading for real. Leverage is a double-edged sword that should be handled with a lot of care and having enough funds to meet the margin level is essential to keep your trades running without any interruption.
What’s The Importance Of A Trading Plan?
Now you know that a trading plan is a methodology that you will stick to for making decisions that will take you closer to your trading goals. Your trading plan is relevant as it makes all your trading decisions rational and in the absence of a proper plan, you will end up making emotional decisions. The trading process should be carried out logically and the influence of emotions can ruin your plan. A trader should only follow their plan and the stress, fear or greed that you feel while trading should not overpower your thinking.
When you devise a trading plan, your goals will become more clear and you will break it down to small targets which will be the milestones in your trading journey. You will get to evaluate your trading account performance by comparing the actual results you get with the results you expected. Thus, the trading plan helps you to keep track of your progress and detect any deviation that happens. Having a sound trading plan surely makes you a better trader allowing you to enhance your skills without taking excess risk.
Steps To Develop Your Trading Plan
- Set Your Goals
A journey would be meaningless if it doesn’t take you to the desired destination and your trading plan will also lose its meaning if you don’t set your goals in advance. You should set both long-term goals and short-term goals to stay committed to trading for a long period. The short-term goals can be attained sooner and this reward will encourage you to keep working towards the bigger goals that take more time and effort to achieve.
Those who have unrealistic goals will struggle to come up with a strategy that works and thus you have to stay grounded and apply logic. Your trading goals should be measurable and time-bound as such goals will help in following a disciplined approach. Because becoming consistent is essential to retain your success and stay profitable in the long run. When you are clear about the goals, devising your trading plan will be easier.
- Fix Your Trading Hours
Once you have set your trading goals, you need to fix your trading hours and decide how much time you can set aside for trading. Since the forex market runs 24/5, you can adjust the time to match your schedule by selecting a trading session that will work for you. The time you choose for trading is very important as the trading volume, liquidity and volatility of currency pairs will be different depending upon the time at which you will be trading.
Having enough liquidity and volatility is important for a smooth trading experience. Even the cost of trading that you pay as spreads will be high when there is not enough liquidity and the chances of slippage increase when the market becomes too volatile and the trading volume is low. So, you need to consider all these aspects while deciding your trading schedule. This will directly impact the success rate of your trading plan.
- Choose Your Risk/Reward Ratio
You cannot expect your trading plan to work without prioritising risk management and thus the 3rd step is choosing your risk/reward ratio. Here risk is the potential loss or the amount of money you can risk for a trade and reward is the profits that you can earn if the trade goes in your favor. You can use different trading tools to have an accurate risk-to-reward ratio. For example, a margin calculator can help you identify the right margin you should trade with, then a profit calculator can help you find out the potential profit you can earn from the trade in the base currency of your account. Similarly, you can use other tools to efficiently manage risk to reward.
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Your risk/reward ratio should always be greater than 1:1 as this allows you to maximise the gains while minimising the risk and limiting the potential losses. No strategy can give you a 100% win rate and you will surely encounter losses during the trading process but the impact of these losses can be reduced by trading with an optimal risk/reward ratio that keeps your account drawdown in limit even with a low win rate.
Conclusion
In a nutshell, the significance of a trading plan can never be overstated as it is the foundation for building a successful trading career. It would be right to say that the first step towards profitability is planning and the success of your trading plan depends on your knowledge and skills.
