A winning Forex trading plan should be the starting point for any journey to becoming a consistently profitable Forex trader. Yet unfortunately most traders don’t write one until they’ve blown a few accounts. Even then the task to write a trading plan often falls into the category of, “I’ll get to it when I have time”.
So why do most traders avoid taking the time to write one if it’s so important?
The answer is simple – we don’t like rules.
And this doesn’t apply to just traders. I use the term, “we” loosely to mean all humans.
Think about it, how many of you like being bossed around at work? How many of you got any kind of joy being called by your first and last name by your parents when you were younger? I don’t know about you, but that always meant I was in trouble. Why was I in trouble? Because I broke a rule.
Enter Forex, a limitless environment without many rules. Other than the rules set by your broker, you’re free to do whatever you wish. That’s a scary proposition for someone who has been bound by rules their entire life.
I attribute this one thing to the phenomena of why so many traders fail – they can’t handle having no rules to follow. Or rather, they didn’t take it upon themselves to set the rules.
In this lesson we’re going to take a look at what a Forex trading plan is, why it’s so important as well as some of the topics you should consider including in your trading plan.
What is a Forex Trading Plan?
A Forex trading plan is the blueprint of everything you do as a trader summed up in the most concise, yet descriptive, way possible. Your trading plan should consist of when and how you trade as well as what you do before and after a trade.
However writing your Forex trading plan is not the difficult part. The difficult part is writing the plan in as much detail as possible while keeping it as concise as possible, preferably to a single page.
After all, a trading plan that that is eight pages long and takes fifteen minutes to read isn’t likely to be referenced often – which is what you should be doing.
Lastly, a Forex trading plan needs to be revised as your trading skills improve. Please don’t make the mistake of thinking that your trading plan is set in stone and you simply have to make it work.
Be open to revisions as you move along in your trading career, just remember to always follow the most up to date version. Otherwise you will find yourself drifting through the market trying many different “things” without knowing what works well and what doesn’t work so well.
Why a Forex Trading Plan Is Important
Simply stated, a Forex trading plan helps to keep you disciplined. Trading is a business and needs to be treated as such. Just as a business has standard operating procedure to keep things running smoothly, you have a trading plan to stay disciplined.
As previously mentioned, the Forex market is a limitless environment without many rules. Therefore your trading plan needs to serve as your rule book to help keep you out of trouble.
The trading plan is also a great way to test what works and what doesn’t. A successful experiment always involves one control and multiple variables by which the control can be tested against. Your Forex trading plan becomes the control by which you test variables (entry and exit methods, various price action patterns, etc.)
Building Your Forex Trading Plan
Now it’s time to start putting the pieces together. Below I’ve outlined what I feel are some of the most important topics to include in your trading plan along with some helpful tips to get you started.
This is by no means a complete list so feel free to add your own topics as you see fit.
Determine your trading strategy
Every winning Forex trading plan starts with a well-defined trading strategy, or strategies. Every topic below will reflect what you enter here in some way.
For me this topic includes the pin bar trading strategy as well as the inside bar trading strategy. It’s important to outline each strategy you will use and outline the market conditions necessary to validate a trade setup.
Does a market have to be trending or can it be range-bound? Does the pin bar have to occur at a support or resistance level or will you also consider trading continuation pin bars?
Define the time frames
This one is straight forward but also crucially important. You’ll want to define the time frames on which you will be trading.
The omission of this one simple rule has been the cause of a lot of headaches for many traders. I can’t speak for everyone, but when started trading back in 2007 I was constantly switching between time frames. One week I was on the one hour charts and then I’d get bored so I would move to the five minute charts the following week.
Not only that, but I had a habit of entering on the one hour chart and then switching between the 4 hour chart, daily chart, fifteen minute chart and even the five minute chart, just to see if they looked “okay”. I had no idea what I was looking for, but I was determined to make sure each time frame looked favorable.
Choose one or two time frames you’re most comfortable with and stick to it. Look for setups on these time frames, trade on these time frames and exit on these time frames. This is the only way to break yourself of the “time frame dance” that I think we’ve all experienced.
Identify your watch list
As part of your Forex trading plan, you will want to define the currency pairs that you will trade. Much like your trading plan as a whole, your watch list will change over time. I usually recommend someone start with about 10 currency pairs to watch at any given time. This will give you plenty of setups each week even on the higher time frames.
As your trading skills improve and your confidence grows, you can expand this list to include other pairs and even some commodities. My watch list currently contains about 25 instruments that on average give me one or two solid trade setups each week.
No, you don’t have to meditate. Although I do highly recommend it!
Mental preparation is without a doubt the most commonly omitted topic in a trading plan. Perhaps it’s because traders get too caught up in defining their strategy. Or maybe it’s simply because people don’t like to talk about their feelings. Whatever the case may be, this one is a must!
How do you feel today? Did you get a good night’s rest? Are you feeling energetic, sluggish or somewhere in the middle? These are all questions that need to be asked as part of your trading plan.
We’ve all had “those” mornings. Whether it was a late night with friends, the stresses of life keeping you up at night or maybe you just woke up on the wrong side of the bed. These mornings happen to the best of us and they will continue to happen.
It’s your job is to assess the situation and figure out if you’re mentally prepared to face the markets. If not it may be best to sit this one out. The market will always be there tomorrow and trust me when I tell you that you’re far better off waiting to trade until you’re mentally prepared than to lose money because of a mistake that you wouldn’t have made otherwise.
Just remember, being flat (having no positions open) is a position and it’s the safest one you can have.
Establish your trading risk
As many of you know, I’m not a huge fan of establishing your risk in terms of a percentage. A much more effective approach is to define your level of risk as a monetary value. See my article Pips and Percentages Will Only Get You So Far for more information.
But let me stop you there. If defining risk as a monetary value is the preferred method, and establish a percentage has some value, wouldn’t it be best to use both?
Why yes it would!
Here is how I go about defining my risk as part of my trading plan. First off I want to determine what my risk threshold is in terms of a percentage. I recommend somewhere between 1% and 5% with 2% being the most common.
So now that I know I can only risk 2% per trade, it’s time to define my risk threshold for a monetary value.
But let’s put you in the hot seat to make this more relevant.
Let’s assume you have a $10,000 account and you’re comfortable using the 2% rule that I mentioned above. Using just this rule means you will risk $200 on any given trade.
But at what dollar amount risked do you start to feel a little anxious? In other words how much money are you prepared to lose on one trade? The reason this is an important question to ask is because it won’t always line up perfectly with the percentage you defined above. In fact most times it won’t line up perfectly.
Let’s say your threshold is $100. Anything over that and your emotions may start to get the best of you. But $100 is half of what your 2% rule is telling you to risk…
This is why it’s so important to define risk as both a percentage AND a monetary value. So which do you choose? Most traders go with the 2% rule simply because that’s what everyone says to use.
I say nonsense.
A percentage only has value once you assign it to another number. And that number, which in this case is money, is far more likely to get you in trouble if you aren’t careful than some arbitrary percentage.
Of course these numbers will change as your account grows. But just be sure to always define both money risked and percentage risked as part of your Forex trading plan.
Define your R-multiple
Your R-multiple is simply your risk to reward ratio stated as a single number. For example if you risk $50 on a trade and your potential profit is $100 (based on your target) then your risk to reward ratio is 1:2. In other words the risk is half the potential reward.
Stated as an R-multiple this becomes “2R”. Another example is $50 risked for a potential reward of $160. When we divide 160 by 50 we get 3.2R.
It’s important to set a minimum as part of your trading plan. I personally use 2R as a minimum so that I know my risk is never greater than half the potential reward. Of course the higher the R-multiple the better so no need to set a maximum value here.
Set entry rules
How will you enter the trading strategies that you previously defined in your trading plan? For example if one of your trading strategies is the pin bar, what entry method will you use? Will you enter at a break of the nose of the pin bar or perhaps you favor the 50% pin bar entry.
If you’re open to using both entry methods you should also define when to use each of them. What market conditions will justify using the 50% entry method? What market conditions need to be present to justify entering on a break of the nose of the pin bar?
Set exit rules
Oh, where to begin? This is one of the more misunderstood rules when it comes to writing a trading plan Why? Because everyone is so obsessed with finding a trade setup that they completely forget to look for the exits before entering a trade.
Let me restate that by saying that most traders are excellent at finding one possible exit – the profit target. Everyone loves to see how much money they stand to make on any given trade. But without setting your exit rule in the event of a loss you won’t be able to properly define your R-multiple.
In this section of your trading plan you’ll want to define where your stop loss will be placed as well as how you define your targets. Speaking of targets, you’ll also want to describe in detail how you plan to exit a profitable trade. Will you exit the full position at the first target? Or will you exit half of your position and keep the other half on the table?
These are all questions that need to be answered in this section.
Establishing rules for how you manage risk is an essential part of every good trading plan. Although you have already established where you will place your initial stop loss, you will also want to outline how you plan to trail your stop loss, if at all.
For example in my own trading plan I use the highs and lows of previous days as a place to “hide” my stop loss. But I typically won’t move my stop until the market has had a chance to move well beyond my entry. Of course my plan defines what “well beyond” means, and you will want to do the same.
The topic of risk management is what makes or breaks a trader. As I’ve said before, it isn’t your win rate that makes you consistently profitable. It’s the amount of money made when you win vs the amount of money lost when you lose, averaged out over a series of trades. And the only way to tip the scale in your favor is with a solid plan for managing risk as well as a disciplined approach to executing the plan.
After the Trade
What you do after a trade is just as important, if not more so, than how you mentally prepare before a trade. Here is where I like to list rules to follow after both winning and losing trades.
Arguably the most important rule of them all is how much time will you take away from your trading desk before entering the next trade? This is extremely important!
After a losing trade you may feel tempted to take revenge on the market and make back what you lost. This is called revenge trading and is one of the larger contributors to why so many traders fail. The urge to immediately hop back in the market after a winning trade is just as strong. This urge is caused by two thoughts.
- You feel invincible. That feeling you get when everything is going your way, so why not take another trade and make even more money? Building confidence is one thing, but failing to recognize over-confidence in key situations is called arrogance. And arrogance has no place in the Forex market.
- You feel as though you now have money to spend. The profit from the last trade is like “found money” so it’s okay if you give it right back to the market. I call this “Casino Mentality”. It’s the same feeling casino players get after they’re up $500. Instead of walking away they immediately bet the $500 only to lose all of it and then some.
Use this section of your trading plan to define how you need to mentally prepare for the next trade. Everyone is different, but I haven’t met a trader yet who didn’t need some time away from the market after a winning or losing trade.
Putting it All Together
The hardest part about writing your Forex trading plan isn’t defining your rules. In fact once you start writing it you’ll find that the various rules fall into place quite easily. The hard part is including enough detail for it to be effective yet being concise enough so that you’ll actually use it.
Remember that the whole idea behind building a trading plan is for it to be read daily. This means keeping it to one page (two at the most) and hanging it somewhere that’s easily visible from your trading desk.
I hope this article has given you practical advice about how to write a winning Forex trading plan. My goal was to not only provide some of the more important topics, but to give you some ideas to help you get started.
Did I miss anything? Share your experience with writing or using a Forex trading plan in the comments section below.
I look forward to hearing from you.
Simply, Loved it. Thank you.
Res, that’s great to hear. Glad I could help.
This is so very very true and if you could never forget it I think that is 50% of the battle won. To see it in writing turns on the awareness as the little voice inside you that tells you you are in this trap is sometimes too soft to hear in the moment
Liesel, absolutely! Most traders neglect this step, which is a big mistake in my opinion.
I feel writing a plan is utmost important.It creates a neural circuit in brain and thus makes it a longterm memory.Nice article.Thank you Justin.
Ravi, I could not agree more. Thanks for stopping by.
A trading plan ? My only trading plan was : make as much as you can …. I’ m tired of making money , losing money . Discipline , discipline is the hardest lesson for me … need a trading plan and have to follow it ! Yes!
Gabriele, it’s certainly a valuable tool to help keep you on track with your trading endeavors. Thanks for stopping by.
Thanks for this clear and concise detail about each of the parts of the plan. I had a plan, but I learned from this some details I have been missing. I see how I can improve. Most discussions on this topic are so general that they are not very useful and left me guessing if what I was doing was worthwhile.
Karen, pleased to hear that. Let me know if you have any other questions. Cheers.
I’d love to see an example of a good trading plan.
Maia, the challenge is defining the word “good.” No two traders are alike, so no two trading plans will be alike. That goes for the various rules, criteria, etc. Even the length and detail will vary. It all comes back to what works best for you.
thnx so much
I have found it very informative looking forward to draw my owne trading plan that will suite my expectations
Pleased to hear that, Alan. Cheers.
Justin, you’ve just enlightened me of so many things/traps I’ve felt for.
Thanks for sharing your ideas. Love it. Another thing when is the best time to trade? I mean high volatility?
You’re welcome. Because I mostly trade the daily time frame, I don’t pay much attention to the various sessions, but this post might help: https://dailypriceaction.com/friday-qna/what-is-the-best-day-to-trade-forex
Thanks very much Justin you have really open my mind
I have been holding to wrong strategies without realizing the shortfalls of them.
It’s been few months I learned about PA. You have really made it look simple.
You are really God sent. I’m now going to start practicing it again.
Hope I will join the members area soon.
Thanks & kind regards.
You’re welcome, Sello. Let me know if you have any questions.
All I can say is I’ve been following your advices and they are the best and you get everything straight to the point, you make forex trading easy. I thank you
Hi Justin thanks, as an Industrial Engineer and Brand New to trading I have been discussing with myself how do I go about putting together a plan. I always say to my clients “If you Fail to Plan, you are Planning to Fail” and, here you are with some very logical answers and questions. Thanks once again. Will let you know, regards Peter.
Thanks Justin,you have taken a big burden off my shoulders.I will now attempt to write my first trading plan.
Permit me to share it with when i am done,just for you to go through it and assess it.
I would need your email address.
Thank you in advance
It’s nice article on trading plan. If possible will you post your previous trading plan to get an exact idea🍀
Justin I am from malaysia,i been following your advice skill for sometime i find useful and helpful.U r right every traders lose because of mentally attitude.what u said really open up my mind set thanks
For a newcomer like me, its a comandment to keep to if u want to succeed in forex trading. I will make mine and stick to it.
Have read the requirements of a trading plan.
The simplest but the best write up I ever read in forex so far. Keep it up, keep it on. Thanks
THANKS, YOUR PLAN COVERED EVERY POSSIBLE THING.
Justin, thanks for your posts and comments. All very good. Now I’m looking to enter forex and have a very basic understanding but struggle right now with charts and marking of charts initially (SW & SH) lines to begin to analyse those charts. will your course be a good starting point or would you recommend something prior perhaps?
Thanks again for the eye opening lesson,I was in the dark but you have made this so simple and clear.
Hi MR Justin! Am really appreciate for this.
Great stuff you got, very detailed. Thanks for the information.
in fact you are more parental. All read an a big lesson learned I lost my money due to casino trading. Am so grateful sir
Thank you, the main thing is to practice,practice and practice your trading plan!
Thanks a million times, I wish I had known you long ago, I paid money for useless courses. Justin you have whipped into the right track and I I’m 100% sure that my account Will surge in no time. Thank yo
Thanks alot. Am learning Forex trading and Am ready to write my plan right from the first day I start trading – from next week. Thanks alot
Am very happy am learning a lot. Thank you
Thanks, Nelson. Glad you enjoyed it.
Good pieces of advice, thanks Sir.
You’re welcome. Glad you enjoyed it.
Haven’t written a trading plan as a beginner and has caused me to loose money. Will start right away.
Thank you for this eye opener.
thank you very much for the lesson sir
Hello sir, This is a very nice article you have written. I really appreciate.
This is nice of you.
You’re welcome, Raphael.
Thank you for adding so much value into my trading world. All of your articles allows for self introspection so I can make necessary changes where needed. I am a culprit of all the wrong doing you mentioned in this article. I am inspired and looking forward to make myself proud and share my success within this community very soon.
Your the Best
You’re very welcome. Cheers.
Loved this. I am writing a plan right now.
With havin so much content do you ever run into any issues of plagorism or copyright infringement?
My site has a lot of exclusive content I’ve either written myself
or outsourced but it looks like a lot of it is popping it up all over the web without my permission. Do you know any methods to help prevent content from
being ripped off? I’d really appreciate it.
Your steps to writing a trading plan are quite easy and brief,I like it,thanks Justine
Honestly is the most crucial (head line of the trading book ) thanks .my friend
Thank you Justin, Just what I needed. I do not have a trading plan at all. with the help of this article will definitely draw up one,
This article on Forex Trading plan is very educative and helpful.
Thank you for an insightful view into a Business/Trading Plan. I have been a business owner from the age of 25 and it took many years for me to write a plan, after that I became more successful I am now retired and enjoying life. I started trading April 23 2020 only a demo account as I have learned the hard way not to rush into anything. I feel that while it is true that human nature hates the confinements of rules and that is one reason why the world is the way it is, I also believe another major reason why people shy away from a plan is because of the fear of inadequacy (at least it was for me). Most people have never owned a business and think that you just walk in and operate. When realizing they need a plan they shy away from it because it is too hard and or do not know where to start, which as said, was true for me many years ago. Anything new for a person comes with resistance to change as it has become normal way of life due to a lack of knowledge about putting things on paper and as you said a fear or dislike of hard and fast laws. After reading your article you have gone far to allay that fear and given real direction. Great Article, thank you again.
Just to say that i enjoyed the lesson about the importance of making a Forex trading plan as well as writing it. i’m so impressed about the DO’S and DON’T. So as per your advise, i will read and read and read again until i feel comfortable to join the business. Many thanks Justin!
Hi Justin, this is so true. The information will surely help.
How can this be applied to trading CFDs?
Continue your good work of providing insight how to get ready to trade Forex
I was a bit blind trading not aware of rules and emotions that I need to conquer with Forex. Thank you Justin for sharing these experience 🙂
This has been very helpful. Than You. I would like to suggest that the first point in the plan is the reason for engaging in Forex Trading and the objectives that are hopefully derived from it.