Four Steps to Building a Solid Forex Trading Plan
Did you know that Forex is the largest and the most liquid market today? What makes it lucrative for investors is that it allows them to invest a small amount of money and yet achieve great return on investment. However, you need to keep in mind that currency trading isn’t about making money overnight. On the contrary, it requires developing a solid, long-term strategy. Here are some basic steps you need to know if you’re planning to enter this market.
1. Choose a Trading Style that Meets your Expectations
Before you start trading Forex, you need to know what your strengths and weaknesses are and, in accordance with that, determine in what direction your currency trading career will go. Only by defining your goals clearly will you be able to choose an adequate trading style. For example, if you aren’t comfortable with leaving your positions open once your work day is over, you should stick to day trading. On the other hand, if you are interested in making long-term investments and believe that they will pay off in a few weeks or months, then you definitely have a chance to succeed in position trading.
Even though this might seem irrelevant to your right now, these initial choices determine your entire career in Forex trading. Choosing trading techniques you are not familiar with might result in poor decision making and, therefore, heavily affect the outcomes of your trades.
2. Choose a Licensed Forex Broker
Parallel with the growth of the Forex market, the number of brokers rises as well. Precisely because of this, you need to do a detailed research before you choose a broker. First, you need to check their regulatory compliance. Namely, all reliable brokers need to be approved by a licensing institution in their country. For example, those who do Forex trading in Australia need to be registered with Australian Securities and Investments Commission.
Another important thing you should pay attention to is a trading platform. You should choose a broker who provides you with the platform that enables you to do the analysis important for your further investments.
3. Analyze the Effectiveness of you Trading Practices
In order to succeed in the hectic world of currency trading, you need to constantly analyze your trading performances. First, you need to calculate your expectancy. By monitoring and analyzing all your trades (both winning and losing), you will have a full perspective into the effectiveness of your trading efforts. Additionally, on the weekend, when all the markets are closed, you should analyze your weekly charts and look for the factors that might affect your trades. This way, you will be able to predict potential problems that could cost you money and make data-driven decisions to prevent such situations on time.
4. Focus on your Trades rather than on Measuring Equity
Every Forex trader dreams of a system that enters and exits trades only when they are profitable. In this case, everyone trading currencies would be filthy rich. Unfortunately, such a system doesn’t exist. On the contrary, when setting out to the uncharted waters of FX trading, you need to understand that suffering small losses is inevitable in this market. Think of it this way- in order to succeed, you need to lose some battles. However, if you have a strategy to back your trading decisions, you will win the war, or in this case, make a profit. For example, in order to protect yourself from losing large amounts of money, you should leverage your trades to a maximum risk of 2% of your total capital.
Finally, the FX market is constantly evolving and, parallel with it, our approaches also need to. In order to be able to keep up with these changes, you need to develop a trading plan that works, and the abovementioned tips are something you should definitely keep in mind.