It’s a commonly known fact that all forms of buy limit involves risks, Forex Trading is no exception. And in order to achieve Forex Trading Success, the first and foremost step is to have a robust trading plan.
Serious Forex Traders like myself who make a living trading the currency markets treat this as a form of “Business”. And like all brick and mortar business models, our “Trading Plan” is the equivalent of a “Business Plan”. Imagine if you are planning to loan money to a new business as a form of investment.
Would you fork out your hard earned money to someone who don’t even have a decent business plan or to someone who said they were going to start their business based on their “Gut” feeling? Logically speaking, it is not feasible for a person to start a business solely based on gut instincts alone, yet alone trading with your hard earned money.
Unfortunately, the truth of the matter is that majority of new traders have the tendency to start their trading endeavors in exactly that manner. Newbie traders often do not have any trading plan or agenda at all. In fact, most beginner traders barely have a valid reason for entering a trade, they simply shoot from the hip.
Now, how do you expect to achieve Forex Trading Success if you don’t even have the faintest idea what you are getting yourself into?
Luckily, creating a trading plan is actually not that difficult.
In my book, there are several essential components of a trading plan and these include the following:
- Trading Goals & Targets.
- What Currency Pairs To Trade & When To Trade Them.
- Proper Money Management.
- Effective Trading Strategy.
- Trading Mindset
- Trade Analysis & Reflection.
Trading Goals & Targets
First and foremost, you got to ask yourself why are you trading in the first place?
What are your goals and objectives for trading? How much return on your investment do you want to make in a month? Are you going to be a day trader or a swing trader?
These are the typical questions you need to know before you even begin trading.
Next, you need to define your trading goals and targets. Most newbie traders have totally unrealistic goals. I actually met a new trader who have no prior trading experience, bought a best selling e-book on Forex Trading on the internet and sworn he will be able to turn his initial $10,000 investment turn into $100,000 in one year’s time. Although this is possible, it is highly improbable. These unrealistic expectations are often the Achilles Heels of most newbie traders.
From my experience, I reckon that if you are able to break even in the first year, give yourself a pat on the back. Most beginner traders I know can’t even achieve that.
What Currency Pairs To Trade & When To Trade Them
For some weird reasons, most traders have the tendency to trade their own currency, perhaps this is their way of showing “Patriotism” or something like that.
But my personal preference is to trade currency pairs that are fairly volatile and have tight pip spreads. Personally, I prefer to avoid trading currency pairs that are illiquid and choppy. Currency pairs like the EUR/USD and the USD/JPY are my favorites. Other traders I know love trading choppy pairs instead, well, it’s entirely up to your own trading preference.
Next, you also need to decide when is the best time to trade these currency pairs that you have selected.
Since I trade around the clock, I choose to trade these currency pairs when their respective foreign exchanges are “Active” and where trading volumes are high.
Proper Money Management
Money management is probably the one of the most important aspects of trading.
Would you rather be a fantastic trader, but used poor money management? Have 9 small wins and 1 major loss that practically wipes out your entire winnings. Or would you rather be an average trader, but have prudent money management, making a tidy profit even when your win-to-loss ratio is against you. I think the answer is pretty obvious.
Even the best traders will eventually blow out their account if they don’t manage their risk levels properly.
Most successful traders are only willing to risk only 1-3% of their account equity on each trade, this ensures that they stay longer in “Business” if you encounter a draw down.
Effective Trading Strategy
The other aspect of Forex trading success most traders are concerned about is perhaps the Trading Strategy used.
I can’t stress enough that there is no such thing as the “Holy Grail” of Forex Trading, there is no perfect trading strategy that ensures you win 100% of the time.
Traders should instead focus on using a trading strategy that gives then a trading “Edge”, one that stacks the probabilities in their favor, allowing them to win more than they lose in the long run.
Without an effective trading strategy, proper money management will only mean that you lose your account equity slowly but inevitably.
Trading mindset deals with a trader’s thoughts, habits and emotions. It is by far, the most important component that determines your Forex Trading Success. Four human characteristics of “Greed”, “Hope”, “Fear” & “Ignorance” will always rear its ugly head in every trade we make.
Without a properly trained mindset, newbie traders have the tendency to change their strategies whenever they encounter a draw down.
Draw downs are common, and they can happen to the best of traders, it is how we return to basics and not deter from our trading plan that makes us successful in the long run.
The currency market is not just the largest financial market in the world, it is also the largest mirror to our soul.
Trade Analysis & Reflection
The final component of a good trading plan is to keep a journal of all your trading results.
For starters, you can use a spreadsheet to keep a simple record of your trades made in terms of the currency pair traded, time of entry, reasons for entry, profit or loss made etc.
Next, analyze what are the trades that cost you money and how you can avoid making the same mistakes again.
Correspondingly, analyze the trades that made you money and how you can fine tune it so that it has a higher chance of achieving similar results in the future.
The statistics on this spreadsheet will allow you to identify problems with your trading strategy so you can fix them.
Remember to track everything in monetary dollar value instead of pips as a 100 pips profit may represent only $10 depending on your risk management ratio.
In my book, all successful traders have some sort of a trading plan, and it is imperative that all newbie traders formulate theirs and stick to it in order to achieve Forex Trading Success.