Building a Concrete Trading Plan That Leads to Success
Successful investors and traders, like Warren Buffett and George Soros, have been able to profit from their respective market enterprises by differentiating themselves from the 90 percent of the herd who end up losing money. If you desire to be a successful trader in the Forex market and one day pay taxes from your trading earnings, building a trading plan should be the quintessence of your chosen career. Here is a guide to building a solid Forex trading plan.
Get Your Priority Straight
Any thoughts and actions you make while trading should manifest an underlying priority or objective. Without having a clearly defined priority, it's impossible to consistently profit from any financial market, even more so from a highly volatile and unpredictable market like foreign exchange. Is your priority to learn how to trade in general and not so much about Forex? Perhaps faster account growth and higher profit potential? Or maybe you are trading Forex as a way to diversify your overall investment portfolio alongside stocks and bonds. Regardless, know what your priority is as this will serve as the backbone or skeleton to your trading plan.
Identify Currency Pair
There are more than 20 tradable currency pairs in Forex, but it doesn't mean you should trade all of them. For beginners, it's advisable to stick with major currency pairs including Euro Dollar, Dollar Yen, Pound Dollar, and Dollar Swissy. These terms may sound foreign to you now, but as you learn more about Forex, they become simpler to understand and manage. Exotic currency pairs, such as Euro Turkish Lira, Dollar Swedish Krona, and Dollar Mexican Peso, tend to be more volatile, harder to borrow, and cost more in commissions. Only trade exotic pairs if you are experienced in Forex and have clear reasons of why the underlying economies and its respective currencies might surge or drop sharply.
Choose a Time of Day/Night
One of the benefits of trading Forex with a stalwart broker like AlfaTrade is that you have access to price quotes and can trade 24 hours, 5 days per week. This means you can trade as early as 4 AM Monday morning to as late as 11 PM on a Thursday night. Round-the-clock access to Forex, however, can act as a double edge sword, especially to beginners. This can force you to trade nonstop, which achieves nothing but increase your capital risk exposure. To avoid overtrading and to minimize financial risk, choose a specific time for opening and closing trades. It can be anywhere between 8 AM to 10 AM or 6 PM to 10 PM.
Determine Risk-Reward Ratio
Risk to reward ratio basically means how much you are willing to risk for every dollar gain. A risk-to-reward ratio of 1:3 means you are willing to risk $1 for every $3 of potential profit. A wider risk-to-reward ratio is desirable as this increases your profitability over time. For example, if you have a 1:3 risk-reward ratio over 100 trades, you'll simply need to win 25 percent or 25 of those 100 trades to break even. On the other hand, if you risk $5 for every $1 of potential profit, you'll need a win rate of 83 percent just to break even, and winning 83 of 100 trades is near impossible even for experienced Wall Street traders and bankers.
Focus on Fundamentals and Technicals
Have a set of fundamental and technical factors that will guide your investment decisions. This cannot be the same information for every trade as underlying basis for each trade will vary either mildly or immensely. A price action setup or a fundamental news event that you based your last trade off of will have changed by the time you build up on your next trade idea. Avoid using too many parameters for validating a trade idea or setup. This can result in frequent, low-probability trades that you should be avoiding if you desire long-term profitability and success.
These five tips will help any trader, regardless of skill and experience level, build a concrete trading plan that protects capital and increases probability of profit for the long-term. Take the undivided time and attention to building a specific trading plan that suits your needs and objectives rather than copy paste someone else's trading plan off the web.