Importance Of Using A Forex Trading Plan

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Any individual becomes a forex trader and wants to be a success in terms of making a large amount of money from the endeavour. Traders are more motivated when they have a clear plan as they approach the market. One of the most important factors that set the path for success as a forex trader is the mindset of the trader. Cultivating the optimal mindset is therefore a clue to achieve long-term success when trading in the forex market.

Forex trading is a profession where your personal decisions can impact the profits and losses. It, therefore, pays to work with a well-thought out plan that can help you to succeed in your endeavour. It has also been observed that venturing into forex trading without a laid-out plan is a sure way to lose out. For a profit to be realized, a trade has to be liquidated. Read on to learn the basis of forming a forex trading plan, the importance of sticking to the plan and advantages of having such a plan.

How To Make A Forex Trading Plan

Different Types of Forex Technical TradingA forex trading plan helps the trader to form an overall trading strategy and functions much like a road map leading the traveller to a destination. How complex or simple a trading plan should be is decided by the user of the plan. However, a simple plan with easy to follow instructions is always the best bet.

The most important elements that go into a forex trading plan are as follows:

• Financial goals
• Sizes of positions and how to determine them
• Management of positions
• Objective criteria for the trader to choose, enter and exit trades
• Adjustment for trading with change in market conditions

A trading plan can also incorporate simple technical indicators that will guide the trader. Technical analysis involves the study of the volumes and prices of a currency pair, commodities, and stocks. Such price and volume indicators trigger the trader to enter into buy and sell positions in the currency market. As an example, a couple of moving averages at different time frames that cross over may generate a trading signal.

Importance of Sticking to the Forex Trading Plan

It is very important for the trader to stick to the trading plan to achieve the financial goals. Very often, it has been observed that the trader is likely to circumvent the existing trading plan and this is a sure recipe for disaster. Very often they ignore the decision making steps that are usually laid out in the plan.

Bypassing the trading plan usually results when the trader is overtaken by emotions of greed forcing the trader to take profits that are disproportionate. Sometimes it may also happen that with underlying hope that things may turn for the better, the trader can fail to stop losses leading to disaster. It is, therefore best to follow the instructions in the trading plan objectively every time. The trading plan has been formed to protect the trader and minimize losses and maximize the profits.

In addition to not sticking to the trading plan for optimal success, loss of trading discipline is yet another factor that has to be tamed by the forex trader. For the best amount of success in the long run, a forex trader has to exercise a considerable amount of self-discipline.

Another Useful Tool

Another useful tool for the forex trader is to maintain a journal on an everyday basis. Such a trading journal goes a long way in helping traders to better their trading skills. The trading history allows the trader to go back in time and study what they did to counter losing positions and how they reached their winning moves and the market conditions at that point in time. This gives a clear idea to the trader as to what should be repeated and what else should be clearly avoided.

Advantages of Having a Forex Trading Plan

A forex trading plan provides a clear view of the financial destination to the trader. Even with experience in trading through a demo account, a trader may find it difficult when trading with real money in the absence of a trading plan. A trading plan is an organized basis just as in a business plan from which the forex trader can achieve higher levels of success. Forex plans are also of great help when the requirement is one of quick decisions to achieve the most of out of situations that arise in a fast-moving currency market. The largest advantage for a forex trader having a trading plan is the fact that that they can trade objectively according to what is laid out in the plan. As times moves on, this gives the trader a greater amount of confidence and allows lesser emotional involvement while trading. The ultimate factor that determines a trader’s success is when they have the confidence to return to the forex market and start trading after an emotionally-draining loss making trade.

Emotions Have A Negative Effect When Trading Forex

Emotional responses should be a minimum for the best results in forex trading. An undaunted attitude in the face of any market condition is a pre-requisite for a successful forex trader. Common emotions that come into play during trading are fear, greed and hope. Greed and fear, however, seem to be more common. All these cause trouble during the time of trading. Having a good trading plan helps the trader to stay from all of these while trading and follow objective rules. The key to curbing the emotions is self-discipline. Lack of self-discipline usually causes the trader to let emotions play during trading and this paves the path for failure. The best results come when a trader follows a trading plan as strictly and calmly as possible.

Related : Learn about Trading Psychology to Control Your Emotions

Final Thoughts

Traders always benefit when they trade with a higher level of self-confidence. This happens when they have a clear trading plan in place and make a decision to stick to the trading plan objectively no matter what without giving into emotions that may come to the fore while trading.

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