This article looks at the development of your FX trading plan and what it should incorporate.
A FX trading plan is a set of rules that methodically sets out how and when you should place your trades and it includes several factors. To trade successfully, the market you are trading in has to have good volatility and liquidity. Both these can be found in the FX trading market.
Liquidity is the ease with which you can buy or sell currencies. The forex market offers traders good liquidity which offer them tight bid and ask prices and sufficient market depth for orders to be filled quite quickly. There is very little chance of traders sitting with a currency and being unable to sell it, particularly if you are trading the major currencies.
Volatility measures the speed and the value at which prices move up and down in the market. This provides traders with an opportunity to profit from the price movements. Any price change, regardless of whether it is rising or falling creates profit opportunities. You cannot make a profit if the price remains the same.
The types of charts you use will be based on your trading style. It is quite common for longer term traders to make use of long-term charts and shorter term traders generally look at shorter periods. An example of this is that swing traders often use hourly charts whereas scalpers will make use of one minute charts.
You should bear in mind that the price activity remains the same regardless of the type of chart you choose and the different intervals provide you with a different view of the trading market. You may make the choice to include multiple intervals into your trading, but your primary interval will be the one used to define the rules applicable to your entry and exit of trades.
FX Trading Indicators
You should define the indicators you intend using in your trading plan. Technical indicators are based on the currency’s historical and current price action. You should be aware that indicators on their own will not provide you with suitable buy and sell signals. You should assess the signals to find your most opportune entry points and exit points that are in line with your trading style.
Your trading plan should define the settings you will use. If your plan is to make use of a moving average, your plan should define whether it will be a 10-day simple moving average or a 60-day exponential moving average.
Your plan should stipulate the lot sizes you intend trading. It is common practice for novice traders to commence trading with micro or mini lots and once the trading has been proven to be successful, move on to trading more than one lot at a time. This increases the potential for profit, but be aware, that it also increases the loss potential. Once you have gained confidence, you may want to stipulate in your plan that you move on to trading standard lot sizes.
Your trading plan may stipulate at what point you will move from one account type to the next. This could be once you have achieved a certain level of profit. It does not matter what your trading size is, it has to be determined as part of your trading plan.