Forex trading has countless advantages as compared to stock trading or commodity trading. One of the big things about Forex trading is the fact that you have the flexibility to work from wherever you want to, work the hours you want because the FX market trades around the clock 5 days a week. This way, you can create your own work-life balance.
Because the technical nature of the market is the same you can successfully deploy your stock chart reading skills to read any Forex chart and look for trading opportunities.
Last but not least, with Forex trading, you have the opportunity to trade bigger trading size and multiply your capital through the use of leverage, which means bigger profits. With as little as $1000 you can control and trade up to $100,000 if your broker offers you a 1:100 leverage.
As long as you have a trading plan that you can rely on, and you have a laptop and an Internet connection you don’t really need anything else. Recently we sat down with Jeffrey Cammack, the Head of Operations at Fx-Australia.com, to go step-by-step to outline how to develop a trading plan for Forex currency trading.
Jeff traded currencies as an additional form of income while studying, and then while starting a career in online startups. He now spends his time promoting positive trading habits and helping the eager-but-shy trader start a trading career in a healthy and responsible way.
How to Develop a Forex Trading Plan
“Failing to plan is planning to fail” – Alan Lakein
So, this is how to design your own trading plan for use in Forex trading. At the end of this step-by-step guide, you’ll have all the necessary knowledge on how to create your own Forex trading plan.
When it comes to crafting a trading plan you need to incorporate four essential elements:
The Double “W”
The whattype of trader you want to be is probably the most important question you need to answer to yourself. The advantage behind this is that it helps you have a fair expectation from your trades. You need to know what type of trading style suits the best your personality. Are you a scalper, day trader, swing trader or maybe position trader?
Each of these trader types is mainly differentiated by how long the trader keeps the trades open. While scalpers will keep trades open for a little as a minute, a position trader could keep trades open for months. The shorter the trades are kept open, the more time the trader needs to devote to actively monitoring the investment. So, if you are looking for a more passive investment, position trading would be more suited to your trading plan.
The whento trade is also important, especially since Forex trading happens around the clock. Most stock traders only stick to trading around the stock open hour. The time is very flexible when trading the Forex market as you can choose to trade only the major trading sessions that suits best your time zone.
This gives Australians and advantage, as the main European and US markets open in the evening hours in Australia. Because New York is 14 hours behind Sydney, and London is 9 hours behind, this gives retail traders a great opportunity to trade the opening of these markets in the evening hours. This is easier because these hours likely have less conflicts with a working or family schedule.
The next element of your trading plan is to understand exactly when you should enter. You need a systematic approach that should signal you to enter a trade (long or short). You need to have a proper technical analysis system that gives you the exact price you should enter at. If you have a successful equity trading system, simply use that strategy, but before giving it a go backtest your strategy and see how it behaves in the Forex market.
Take Profit and Stop Loss
You should also know the profit target that you’re aiming for in advance to you starting to trade. At the same time you need to define your risk and the point you’re going to admit you’re wrong on the trade and take the loss. It’s extremely important to have these two figures clear the moment you enter the trade. Otherwise, when you’re in the heat of the battle, your emotions will overcome you and you are more likely to take bigger losses or possibly wipe out your account.
Risk Management Strategy
Just as with stock trading, you need a risk management strategy, and this is even more important with Forex trading because of the use of high leverage which has the potential to hurt you as much as it can help. In this section of your trading plan you need to determine:
- Your position size, or in other words, how much leverage you’re going to use.
- Your maximum allowed drawdown.
- You also need to determine your risk to reward ratio
These are just some of the necessary things you need to determine to survive in the Forex market.
Since 90% of the people don’t even bother developing their trading plan, most traders are doomed fail at forex trading from the get go. You’re not going to achieve the same kind of results if you don’t take on the necessary time to craft your own personal trading plan. If you don’t treat Forex trading like a business and if you don’t take developing a proper trading plan seriously, you stand to face an uphill struggle in the world of Forex trading.