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You have probably heard it before: every trader should have a winning trading plan, and they should follow it. I am saying it here, again, but I am going to explain how to go about actually making the plan, and how exactly to follow it. Many traders make the mistake of just trying to get something down on paper as a guide. This is an admirable intention, but the true reason why a winning trading plan (which is always a written trading plan) is useful is because it is the very act of making a personalized plan that burns into a traders mind the “why” and not just the “how”. Knowing “why” you are doing what you are doing, instead of just knowing how, is the key to avoiding common trading mistakes.
Some people think that it is only day traders that need written trading plans. In fact every style of trader needs it.
It is really important to emphasize that many traders get to a point where their analysis is pretty good: good enough to know what they should be trading and in what direction. The problem is that although you would expect this to be enough, it is not enough to make money – at least not for most people, because they fall down on execution. It is in overcoming that final hurdle of executing trade entries and exits that a written trading plan is really most helpful.
Initial Questions to Answer
1. What is your “edge” that you are going to try to use to make money? Do you believe that the direction of the Forex market can be predicted? If so, how? Will you use trend following, mean reversion, or some combination of the two? Will you use fundamental and sentiment analysis or just pure numbers?
2. How much money can you both want and afford to risk trading Forex in your trading plan?
3. Which is the best Forex broker for your account size, country of residence/citizenship and trading style?
4. What is your risk management strategy going to be? What will your stop loss be based upon?
5. Make some kind of back test covering many years and calculate best case, worst case, and average case scenarios for your trading account. Can you handle the worst case?