How to Develop a Forex Trading Plan (Expert Guide)

This article will take you through how to make your trading plan, cutting across novices and well-established traders.

Carson O.
10 Min Read
Making a Trading PlanCourtesy - freepik.com
Highlights
  • Find you trading style. This will be comprised of 4 parameters, discussed below.
  • Plan your trade. This prevents small losses from becoming catastrophic
  • Execute your trade from start to finish.

This article will take you through how to make your trading plan. This will cut across novices and well-established traders who have been trading blindly. Stick to the end as we decipher how to create a forex trading plan in Kenya.

Let’s dive in!  

Settle on a trading style

Before you start crafting your trading plan, you must have a trading style. There are myriad trading styles in the present-day forex market, and it is hard to tell which one is superior to the other. However, it is statistically proven that having a trading style increases your chances of making a profit.

Different trading styles call for different trading plans due to the difference in the rules employed.

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Before getting deeper, let’s first understand what a trading style comprises.

A trading style boils down to how you approach currency trading in terms of:

  1. Trade time frame – Are you a long-term trader, looking to target market variation in weeks or months, or are you a day trader, buying and selling within minutes, hours or days? Settling on one of these is crucial for your trading style.
  2. Currency pair selection – As discussed in a previous post, currency pairs are mainly classified into three, i.e., major, minor and exotic currency pairs. Ask yourself whether you are inclined to trade all different types of currency pairs, or just specialise in one or two.
  3. Trade rationale – Traders may choose either technical analysis or fundamental analysis to make their trade speculations on whether to go long or short. As yourself;
    • Are you considering creating a systematic trading model?
    • What strategy will you follow?
    • Are you a trend follower or a breakout trader?
  4. Risk appetite – Risk simply means what you are willing to lose, over your return expectations. Don’t risk what you are afraid to lose.

The above pointers will help you settle on a trading style. No one expects you to have all the answers or know exactly what trading style you will be using. As you continue learning and trading forex, you will then be able to get all your answers and trading styles right. You can practice different trading styles using demo accounts provided by almost all brokerage companies in Kenya.

Planning the Trade

This is the next crucial step after settling on a trading style. If you don’t merge your trading style into a trading plan, you are going to make big losses in the forex market and get frustrated.

Trading plans are like rate limiters. They prevent small losses from becoming catastrophic while at the same time, converting small but disciplined traders into big winners.

A trading plan is your roadmap in the forex map, once emotions, cortisol and adrenaline hormones start pumping in, no matter what the market throws your way.

The starting point of any trading plan is to identify a trading opportunity. No one is going to tell you when to wake up and trade. The only way to keep yourself in check is by having a trading plan.

Here is an example of a trading plan.

Trading PlanSample Forex Trading Plan
Trading GoalsAim to achieve an average monthly return of 5%.
Risk Management– Risk per trade: 2% of trading capital
– Maximum Drawdown: 10%
– Stop-loss for each trade: 50 pips
Selected Currency PairsEUR/USD, GBP/JPY, USD/JPY
Entry Criteria– Technical: Trade with the trend based on moving average crossovers and RSI signals.
– Fundamental: Consider interest rate differentials and major economic news releases.
Exit Criteria– Take profit at a 2:1 reward-to-risk ratio.
– Trailing stop of 30 pips once the trade is in profit.
Trading Schedule– Trade during the London and New York sessions.
– Avoid trading during major economic news announcements.
Trading JournalMaintain a detailed trading journal to track every trade, including entry and exit points, trade rationale, and results.
Market News MonitoringStay updated with major economic events, central bank decisions, and geopolitical developments that may impact the currency market.
Money Management– Avoid overleveraging and emotional trading.
– Keep risk within predefined limits.
– Never risk more than 2% of trading capital per trade.
Back-testing and AnalysisRegularly back-test the trading strategy on historical data to identify areas for improvement.
Continuously analyze and adjust the plan based on real trading results
Sample Trading Plan

Executing the trading plan from start to finish

The start of any trade comes when you step into the market and open up a position. Opening up a position comes after identifying an opportunity and executing a trade based on your speculation. Here is the step-by-step breakdown:

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1. Opportunity Identification:

  • Continuously analyze the market using technical and/or use of fundamentals to spot potential trading opportunities.
  • Look for chart patterns, trend reversals, support and resistance levels, or news events that may affect currency prices on your chart.

2. Confirming the Opportunity:

  • Ensure that the identified opportunity aligns with your trading strategy and criteria. Earlier in the post, we discussed the importance of a trading style or plan. If the opportunity does not align with your trading plan, it’s best to avoid it.
  • Double-check the validity of technical indicator tools or fundamental analysis information supporting the trade.

3. Position Sizing

  • Determine the appropriate position size based on your risk management rules and the distance to the stop-loss level. We’ll discuss take-profit and stop-loss in a subsequent article.
  • Calculate the position size to ensure it aligns with the predetermined risk per trade (e.g., 2% of trading capital).

4. Placing the Trade

  • Use your trading platform or brokerage account to execute the trade. Examples include FX Pesa, HM Markets, FXTM etc.
  • Specify the currency pair according to your trading plan, lot size, and order type (market, limit, stop) based on your entry criteria.

5. Stop-Loss and Take-Profit Orders

  • Set the stop-loss order to limit potential losses if the trade moves against you.
  • Set the take-profit order to secure profits when the trade reaches your desired target.

6. Monitoring the Trade

  • Keep a close eye on the trade after execution, but avoid constant monitoring that may lead to emotional decision-making.
  • Stick to the trading plan and avoid making impulsive changes.

7. Adjust your Stop-Loss (if necessary)

  • If the trade is in profit and meets predefined criteria, consider adjusting the stop-loss to lock in profits or minimize potential losses.

Read more here.

8. Managing the Trade

  • Follow your trading plan for managing open positions and exiting trades.
  • Use trailing stops to protect profits as the trade moves in your favour.

9. Exit Strategy

  • Let the trade run according to the trading plan’s rules, such as hitting the take-profit level or being stopped.
  • Avoid making decisions based on fear or greed during the trade.

10. Post-Trade Analysis

  • After closing the trade, review the outcome and assess whether the trade adhered to the plan.
  • Analyze the reasons for success or failure and use the information to refine your trading strategy.

Remember, executing a trading plan requires discipline, patience, and the ability to manage emotions effectively. Following a well-structured plan and avoiding impulsive decisions can lead to improved trading outcomes and increased chances of long-term success in the forex market.

Conclusion

This article has laid out the principles of trading styles in creating your trading plan. It’s important to note that a trading plan will not necessarily make you a successful trader. You must acquire more knowledge on executing trades, taking profits, market analysis resources etc. More about this in a subsequent article.

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I am a multi-faceted professional with a strong foundation in Business and Finance, honed since 2020. Additionally, I possess a deep passion for automobiles, serving as an avid car enthusiast. In parallel to my diverse interests, I am also a dedicated student pursuing a career in the medical field.
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