One of the most important things that separate the successful Forex traders from the losing ones who eventually lose all their trading capital and give up, is that the winning trader is the one who plans. It is very important for you as a trader to develop the mindset that forex trader is like running your own business, and it is not like gambling. To help make your trading activities more professional, it is important that you develop a trading plan. This plan is similar to the business plan that you would write if you were launching your own business.
Your forex trading plan will define why you trade, as well as when and how. It will not only help maximize your profitability but also help you avoid many mistakes that will hold you back. In addition, when you stick to your trading plan, you will be able to avoid giving in to your emotions. When you are risking money on a trade, it is very easy to lose your cool if you feel like a trade is about to go against you.
What are some of the components of a good trading plan?
Your trading goals: - Before you start to trade, define what an acceptable risk/reward ratio is for you. How much are you willing to risk for a particular amount of profit? Your risk/reward ratio should also act as a guideline for when you will enter a trade. Is the risk/reward ratio worth it?
In addition, you should also define what your profit targets are, on a weekly, monthly and yearly basis. Make sure that they are achievable, and based on realistic criteria.
Your entry and exit rules: - What are the conditions that will signal that you should enter a trade? Define a list of conditions that will signal when you should open a position. Make sure that your conditions are based on objective criteria and not elusive subjective ones.
Just as important, if not more so, is defining when you should exit a trade. One of the most important things to consider is that you should not be afraid to exit a position when you're down, if the alternative is more losses. For each trade, you should define two exits - your stop loss, meaning the amount of loss you are willing to accept, and your profit target. To ensure that both exits are met, you should place stop-loss and take-profit orders. Once they are hit, you can adjust them if you wish to either try to break even or make a little more profit.