Challenges can seem difficult and impossible to tackle. But with proper brainstorming and planning, there seems to be no problem that cannot be surmounted. This is how overcoming and becoming profitable in the forex market is. The puzzle of this market is the tendency to make money and lose it again, even all of your trading capital.
Research shows that about 90% of traders lose their trading capital within the first year of trading. It has also been proven that the major way to be profitable consistently is the possession and execution of an effectively written down trading plan. As a forex trader, the possession of a robust trading plan is paramount if you intend to overcome the puzzle of making profits and losing all of it in another trade and even your capital.
We will tackle how to create a robust plan that will shift your trading career to a significant level. Let’s begin by looking closely at what a trading plan entails and its importance.
What is a forex trading plan?
A trading plan is simply a written procedure by which a trader would like to tackle the forex market to ensure consistent profitability. It is also a comprehensive document governing the trading activity of a forex trader. A trading plan by its definitions is that which guides and determines what you trade, when to trade it, and how to trade it. Trading plans should be personal, but amateur traders can depend on that of their mentors.
Developing a Comprehensive Trading Plan
- Assessment Of Your Current Trading Journey
Developing an effective plan begins with assessing your current situation vis a vis trading. Are you trading or yet to start? Whether you are yet to start trading or are already actively trading, there are specific questions to ask and answer. The answers to these questions will reveal your current state. In simple terms, you need to do a SWOT analysis. A SWOT analysis is an acronym meaning Strengths, Weaknesses, Opportunities, and Threats. What are the Strengths, Weaknesses, Opportunities, and Threats you have identified in this market? The first two i.e. Strengths and Weaknesses are factors that have to do with you as an individual, chief amongst them is your trading Psychology. The last two, Opportunities and Threats are external factors (Factors that influence the forex market such as interest rates, inflation, political instability, economic growth, etc.)
- Have A Well-Defined Vision For Trading
Your trading vision is the statement of how you want your trading career or business to be in the near future. To be a successful trader, you must see forex trading as a business or career. It is not just a game. Your vision speaks of your motivation for entering into this lucrative but challenging business. Maybe your vision is to be a forex instructor in five years, or you want to experience financial freedom in ten years or earn a certain amount of money monthly through forex trading. It is necessary to state that, the clarity and robustness of your trading plan is hinged on the clarity of your vision. Where there is no vision, there can’t be true success. With the right vision, anything is possible.
- Draft An In-Depth Mission Statement
A mission statement is simply a statement that describes and encompasses the purpose of a business, indicating and defining the overall goals, values, and culture of that business. Following a vision statement is a mission statement. Forex trading must be seen as a business, otherwise your chances of success in this market are lean. If it must be handled as a business, there is the utmost need for a mission statement to redefine the business. This statement must drive the goals and values you will introduce into your trading career. While a vision statement states the future of the business, the mission statement is that which drives the vision into reality. Many treat forex trading as a casual venture to make millions of dollars, but this is far from the case. Most traders with this mindset get disappointed eventually.
- Define your goals and objectives comprehensively
While the mission is an overall statement of your goals, these goals must be defined thoroughly, capturing how they must be achieved. Any trading goal should therefore be SMART-Specific, Measurable, Attainable, Relevant, and Time-bound (SMART).
For instance; a SMART goal would be, ‘I want to increase my trading capital by 15% every quarter’. This goal is SMART and can be further broken down. Putting this goal into perspective, the trader can further plan to make 5% of his capital every month, giving a total of 15% in three months. This will determine how that trader will trade. After obtaining his goal for a specific month, he can choose to rest while gathering momentum for the next month or, probably, reduce his risk drastically.
Trading goals are not set in isolation. A trader must consider his personality and trading style. Are you a position trader, swing trader, day trader, or scalper? What is your risk appetite? You must determine a risk-to-reward ratio before you start trading. Trading the forex market is a risky venture, and one of the ways to deal with the risk and maintain a good trading psychology is to have a risk-to-reward ratio according to your personality and trading style.
A risk-to-reward ratio considers the amount of money you are risking on a trade and the reward or gain on that trade. A risk-to-reward ratio of 1:3 means that the trader is willing to risk, for example, $1000 for $3000. With this, even if that trader loses two trades but wins one, he will still have a profit of $1000.
- Execute your plan and chronicle your trades in a trading journal
A very well-drafted plan without execution is futile. One challenge of humans is discipline. The discipline to follow your plan to the letter is key to success. Some traders have well-written trading plans without proper execution due to the lack of discipline. One of the ways to evaluate your performance is to keep a trading journal. Chronicle every trade you take, documenting the stop losses, take profits, the success of the trades, the kind of trades taken, etc. This will help differentiate the profitable strategies from the useless ones. It will also help you assess your compliance with your goals.
Mike Tyson once said: “Everybody has a plan until they get punched in the face”
If you deviate from your plan, you will need to indicate the reason behind the deviation and the outcome. These deviations may become better strategies to employ later if they are well written down.
Remember that proper Monitoring and Evaluation is the bedrock of every successful business story. Without documenting your trades, you can’t monitor and evaluate anything meaningfully.
