Shares Magazine
November 22, 2007
By: Marilyn McDonald
Welcome to our last and final article in our six week series from IBFX and IBFU. We will be helping you develop your own forex trading plan. Creating a trading plan doesn’t involve me telling you what and when to trade. It has nothing to do with a super fabulous secret system and honestly it won’t be easy. You will need to look at yourself and decide why you want to be in this market and what you are trying to achieve.
We will walk you through the mechanics of setting up your trading plan because it is extremely important for you to know why you are placing the trades you are. In my opinion if you know why you placed the trade and got in and out a points that you have predetermined then you have made a successful trade, even if it wasn’t a profitable trade. If you are not willing to put some work into creating your own trading plan, I think it would almost be more beneficial for you to place your money in a managed account simply to give it a fighting chance in this arena.
Developing your trading plan is very similar to a company Business Plan. It is a device for you to define how you intend to operate your business (or trading). A trading plan lays out how you will make trades - the time, price, volume, and news are all essential components of the trade. While your trading plan may not necessarily be for others, it is still your own road map to tell yourself, and reaffirm to yourself, how you expect to get there. Include goals in your plan: 3 month, 6 month, 1 year, 2 year, 5 year, 10 year, and even 20+ year goals you would like to reach through your trades and investments.
Elements to consider
- What times during the day will you be trading (which sessions)?
- What currency pairs are you interested in following?
- Will you be trading during volatile market moves (fundmental news announcements)?
- How long will you hold your trades?
- How much are you willing to risk in the markets?.
Essentials
There are many essentials you may want to consider in your trading plan. These essentials lay the foundation of your plan and will help you reach your goals. Here are some essentials you may wish to include.
State Your Purpose
- Why do you want to trade in the Forex market?
- What do you hope to gain from trading?
- What are your trading goals?
- How do you plan on becoming a better trader?
- How are you going to use your trading plan?
- Clearly define your purpose for trading and investing.
- State your goals and what you hope to gain and achieve through trading.
Strategy for Buying
- How are you going to find which pairs to trade? Examples: news, research, technical analysis, fundamental analysis, etc.
- How will you refine your “buy list” (currency pairs on your radar you are considering buying)?
- Using Technical Analysis: You need to understand what you are looking at. Understand how the indicators you use work and what they are measuring. Your favorite indicator may not be useful in many situations, in fact I recommend using a number of indicators rather than just one. You must know when to use technicals and when not to use them.
- Using Fundamental Analysis: The Fundamental News announcements can trigger the most volatile movements in this market. Make absolutely certain you understand how fundamentals work.
Strategy for Selling
- Set a desired minimum goal for each trade. You may be happy making 20 pips per trade. Or 50 pips per trade. Set a goal you are happy with and stick to it.
- Use Stop-Loss Orders to reduce risk by automatically selling at a pre-determined lowest price. Oddly enough this is a hotly debated subject. I didn’t used to trade with stops at all. Lately the Euro and the Pound have taught me some hard lessons and I will be incorporating stops into my strategy as I move forward.
- How much are you willing to lose if this trade goes bad?
- Some traders continually raise their stop-loss prices as the trade goes in their direction. This is called a trailing stop and can be a very useful tool for locking in gains and reducing risk.
Strategy for Holding
- What will you do if the price does not move at all after you buy? Sell it and move on, or hold it and wait for action?
- Some traders will hold on to the stock until more activity and volume pick up. They are comfortable waiting it out. This action may require more capital in your trading account, as you may have to hold on to more than one non-moving trade.
Money and Risk Management
- How will you keep your risks to a minimum?
- How will your keep your total account value at a maximum and grow it?
- Research money management techniques - there are many. This can include how much money or what percent of your entire portfolio value to use in each trade.
- Margin: margin can be a very useful tool for many traders, but can be scary and risky if not used properly. You can get a margin call from your broker at any time, which means they want to collect their money now. Margin gives you extra buying power. Margin also gives you additional risk. Use margin cautiously and wisely. Some traders do not use margin at all.
I have a workbook that will help you develop your trading plan on the homepage of my website – www.marilynmcdonald.com. I also have a webcast talking about developing your trading plan you can view at www.moneyshow.com, just search for my name.
Preparation for the Forex trader means making your plan, developing your strategies, testing your techniques, and continually refining it all. The process is never really over and there are good trading opportunities to take advantage of out there. Having a well thought out plan is a solid foundation for a beginning trader. Be dedicated to your plan and stick to it. I would recommend trading on a demo account until you can show decent returns. Then begin to trade micro lots on a mini account. This will ensure that your plan is built upon sound principles and will benefit you in the long run.
Interbank FX is an off-exchange retail foreign currency broker and can be reached at www.interbankfx.com. It’s free Forex education site can be found at www.ibfxu.com. And Marilyn McDonald is an author and foreign exchange trader. She can be reached via her website at www.marilynmcdonald.com