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How to Develop a Trading Plan

There’s no doubt that the forex market is one of the most lucrative and sought-after financial entities in the world, with an estimated total value of $1.934 quadrillion (which is approximately 2.5-times larger than the world’s total GDP).

However, the margin-based nature of forex trading, coupled with the innate volatility of the foreign exchange, create something of a minefield for new traders. More specifically, there’s the potential for traders to lose far more than their initial investment, particularly if they don’t have a viable plan in place.

But how can you go about developing such a plan, and what exactly should it include? Let’s find out!

Why Do You Need a Forex Trading Plan?

If you’re new to the  forex market, there are two key rules that you need to understand. Firstly, it’s imperative that you have a keen theoretical understanding of the marketplace, as this can lay a solid foundation that helps to inform future trades and strategy decisions.

This must also be augmented by a keen sense of determinism, which enables you to comprehend the underlying laws that govern change in the market and analyse real-time and historical trends with a critical mindset.

Both of these elements must be combined as part of a viable trading plan, with knowledge crucial if you’re to successfully analyse the real-time market and identify the most relevant risk factors.

Such understanding will inform everything from your core strategy and trades to your approach to risk-management, depending on your chosen currency pairings and the associated macroeconomic factors.

As for an appreciation of determinism, this will undoubtedly make it easier to create a calculated trading plan that can be easily adhered to, while helping you to avoid emotive-based trades and knee-jerk reactions to short-term or meaningless trends.

What Else Should Influence Your Forex Trading Plan?

Of course, the real-time global economic climate should also influence your plan, particularly when selecting one or two key pairings to drive your portfolio.

In the current climate, for example, the USD/GBP continued to inch higher following encouraging results from a coronavirus drugs test stateside. This has continued a trend that has seen the relatively strong dollar emerge as a viable safe haven for investors, alongside similar currencies such as the Japanese Yen.

Once you’ve targeted key currency pairings, the next step is to hone in on specific geographical markets. After all, the forex market is split into three distinct geographical sessions, so you’ll want to time your trades to capitalise on fluctuating demand levels and daily capital inflows.

Recently, we’ve seen the Hong Kong Dollar thrive against major currencies such as the greenback, with increased fiscal spending in the South Asian region creating huge international demand. If you want to leverage this, it may be worth targeting the Asian trading session between the hours of midnight and 9am GMT, which is when the Tokyo Stock Exchange is open for business.

You should particularly target the one-hour crossover with the European market that exists between the hours of 8am and 9am GMT, as this can create a significant spike in volume and have a direct impact on major currencies such as the yen, the pound and the Euro.

On a final note, it’s important to test and hone your strategy using a forex broker demo account. This enables you to trade freely in a simulated market environment, and one that can bridge the gap between your theoretical knowledge base and practical trading experience