Since you are here, it is highly likely that you know forex trading. Also, you may know that forex is the hottest thing on the internet today. Yet, not everyone that enters the market earns income. It is because the market is volatile, and fortunes change direction unexpectedly fast. However, it is possible to increase the odds of profitable trades despite the volatility.
Things you should avoid to prevent losing money
Often, forex traders opt for forex expert advisors and other tricks to locate trading opportunities. The systems facilitate the formulation of winning strategies as well as helping the trader to avoid whimsical decision-making. Nonetheless, there are mistakes that traders make that predispose them to lose money.
- Overreliance on trading systems
The forex market has experienced traders who have dedicated their time to designing algorithmic FX trading systems to aid novices. Admittedly, these systems are beneficial, especially to traders who lack time to sit at the computer for long hours. Also, the systems are invaluable during market research to locate profitable entry and exit positions. However, overreliance on the systems disadvantages the trader in that one lacks the motivation to understand how the market works.
Understandably, traders should squeeze the market as much as they can for optimum profits. However, it would help if you always avoided situations where the urge to seize every pip leads to holding positions for far too long. The forex market runs for 24 hours a day and five days a week. Therefore, there is always another day to earn reasonable profits. Also, there are plenty of forex products in the market for you to exploit.
- Poor risk management
Forex is popular because traders can leverage their positions to multiply their profits. Unfortunately, leverage multiplies loss by an equal margin. Therefore, you need a sound risk management plan to avoid losing your funds. There are forex charting tools that enable traders to put in place strategies that not only maximize profits but also minimize risks. Additionally, you can make good use of trading tools like stop loss.
Why do you need a forex trading plan?
Above all, you need a forex trading plan to act as a guide all through the trading journey. For sure, forex trading is similar to an emotional roller coaster that is energy-sapping. Interestingly, this is the main reason why many traders opt for FX expert advisors and other automated trading systems. Therefore, the main goal of creating a forex trading plan is to avoid a situation where all your trading decisions stink with your emotions.
Notably, a trading plan enables you to follow a routine. A routine-based trading journey ensures that you maintain a disciplined approach to forex trading. Besides, the routine allows for you to develop a specific path that becomes increasingly familiar. Resultantly, you learn to maximize positive outcomes while cutting down trading mistakes. The path to creating a trading routine begins with developing a sound and realistic trading plan.
Most importantly, a trading plan makes your life easier. Usually, a trading plan lays down the conditions and parameters of your trading style. These inform the kind of trading strategy that you use. If, for example, you have a three-year trading plan, you will always have everything sort out in advance for the three years.
How to create the best forex trading plan
To create the best trading plan, you need the following.
- Motivation for trading
For some traders, forex trading is a hobby, but others view it as a career. For the former, their motivation could be to have fun, but the latter group of traders intends to make money out of forex. , take a piece of paper and note down everything you desire to gain from forex trading.
- How much time are you setting aside for forex trading?
The answer to this question will clarify whether forex is a career or a hobby. An active trading career demands a lot of time. Interestingly, the amount of time you commit to trading will influence the kind of trading strategy that you pursue. Nonetheless, you need to allocate enough time for the best outcome because you need to analyze the market and to strategize. Also, set aside time for learning.
- Clarify your objectives
The best trading plan outlines reasonable goals. For example, you might say that you want to grow your capital by 10% in the five months. By maintaining fidelity to the trading plan, this is an achievable objective. Besides, the goals you set will determine the trading style that you choose. Subsequently, the trading style will inform your risk appetite.
- What is your risk appetite?
The rule of thumb in forex trading is that the more the risk you take, the more the profits you earn. However, always be advised that higher risk could wipe out your account in a flash. A good trading plan outlines the amount of risk you are willing to take. It would help if you had a risk limit, but this can always change as your trading journey progresses.