Let’s cut to the chase: there is no holy grail in forex trading. But, that doesn’t mean you can’t make money in the foreign exchange market. One of the key elements of being a successful forex trader is having a trading plan. It’s basically a set of rules to help you execute your trades successfully. On the other hand, a checklist will ensure you don’t make the simple mistakes that can blow your personal trading account. It’s important to underscore this vital tool will help you become a consistently profitable trader. If you’ve just started your trading journey, here is a detailed trading plan checklist. Read on and learn more!
How much trading capital do I risk?
The truth is, even the best strategy in the world does not guarantee 100% success. A general rule of thumb is to risk only 1-2% of your trading capital. This will ensure you don’t end up getting a margin call. For instance, if your trading account is $1,000 you should risk $20 per trade. Another aspect of money management is having a reasonable risk-reward ratio. This is determining how much you want to earn from the trade in question.
The most acceptable risk-reward ratio is 1:2 or 1:3. This means you should risk $1 for a reward of $ 2 or $3. Thirdly, use leverage or position size wisely. Even if you’re sure of the direction of the market, make sure you risk a fraction of your capital.
Where do I place the stop loss?
A stop loss is a vital tool in your trading arsenal. Nobody can tell where the market will be one month from now. Sometimes, the market can change the direction when high-impact news is released. This is common during ECB, Non-farm payrolls, and FOMC. When a trade goes against your plan, the stop loss is triggered. It’s worth mentioning that it should not be placed randomly. If you have a selling position the ideal place to place the SL is above the swing high. This is the point where the price rises and then falls.
Similarly, when buying a currency pair place the stop loss below a swing low. This will give the currency pair enough room to fluctuate. A word of caution – avoid moving the stop loss every time the trade goes against you.
What is the trend?
A trend is an integral part of the foreign exchange market. It’s unfortunate that most beginners trade minor price retracement only to lose on major price moves. Before you enter a trade, make sure you confirm the trend. Today, candlesticks are used to show the price pattern. It’s important that you use candles that show a higher time frame (1 hr, 4 hr, one day, weekly, and monthly). Alternatively, you can draw a trend line to determine whether the market is bullish or bearish. The main advantage of following a trend is that you have better odds that your trade will work out. If you can’t identify the trend, stay on the sidelines. Similarly, check the resistance and support levels. This is where the currency prices keep bouncing back and forth.
The foreign exchange market uses the law of demand and supply. When there are too many buyers, the price of a certain currency pair rises. The opposite happens when the supply is too high. Since you can’t eliminate the risk in the market, the best you can do is to minimize it.
Does the trading strategy trigger an entry?
Whether you’re trading stocks, forex or futures you must have a strategy. If you use price action, make sure you understand the market direction. When the financial instrument is bearish, be sure to sell the currency pair. And when the market is bullish, enter a buy position. The other factor to consider is the current market levels. Even if a specific pair is following a particular trend, you don’t want to short automatically. Instead, wait for the price to reach a specific resistance area.
A perfect entry will keep you out of losing trades and most importantly increase the chance of getting profit. Avoid taking a trade if a currency pair doesn’t jump out of the one-hour time-frame. Lastly, if a trading strategy works best in a specific trading session (London, New York, Asian) stick to that.
Are your emotions in check?
Before you enter a trade, you must assess your emotional state. Knowing how to control your emotions could mean the difference between success and failure. When you maintain a calm demeanor you’ll avoid making careless mistakes. Just imagine executing a buy position and then it turns red after the release of high-impact news – this can set your heart racing. Well, this is common in the currency market. If you make a rational decision when entering a trade, calm down and let the market work its way out. It’s prudent that you evaluate whether you’re mentally and financially prepared to take the risk.
A common mistake that can take control of your emotions is risking too much. Most novice traders treat forex as gambling only to end up burning their account. If you risk more than 2% of your trading capital, you’re greedy. To be a profitable trader, you must treat forex trading as a business. You don’t risk everything you have. One of the trade mechanics to keep your emotions in check is trading with a stop loss. This means you’re not relying on HOPE that the market goes to your direction.
Most beginners hold a losing trade hoping the market will turn in their favor. Another factor that can make you get emotional is taking a revenge trade. To avoid getting nervous, you should trade the right market conditions. And if your personal rules are not met, the best solution is to step away. Remember, you don’t have to trade every day.
Do I have a plan to exit a trade?
What should I do when an event happens in the middle of a trade? Experienced traders set their trades and forget. However, this can be a real problem for beginners. They want to know what is happening to the charts every minute. Sometimes, when the market moves in your direction, you may consider using a trailing stop to make the most out of the trend. Since you have a strategy, stick to it no matter what.
A trading plan checklist doesn’t have to be complicated to make you a successful trader. If you’re just starting out, you should make it part of your trading routine and you’ll be on the path to success. Keep in mind, a checklist is of no use unless it’s written down.