How to Design Forex Trading Plans and Rules

Just about every consistently profitable forex trader uses a trade plan and follows it in a disciplined way. Accordingly, this successful trading mindset represents a key forex trading guide post that you will want to emulate as you grow as a forex trader.

Many profitable traders use relatively simple technical analysis techniques and rules that they incorporate into their trading plan. Perhaps they might observe classic chart patterns in the process of forming, or they might look for trading signals on various technical indicators.

Initial Trading Plan Preparation

Novice forex traders will probably want to either obtain some mentoring or a trading system from a more experienced trader to get a sense for how such trading plans should operate in practice.

They might also benefit from studying technical analysis and how it can help you generate trading signals and set take profit and stop loss levels. Some traders also perform a fundamental analysis review or have a plan for trading the volatility that commonly occurs over major news releases or at the market opening.

Once you understand the basics of how the forex market works and how to generate trading signals, coming up with a forex trading plan can actually be quite a simple initial process.

You can also later refine your plan after developing some more experience with operating under a trading plan and have the opportunity to see where problems might arise.

The main characteristic that you will want to achieve with your trade plan will be an objective way to trade the forex market that will help you remove the emotional element from your trading activities.

Elements of a Basic Forex Trading Plan
You will first want to set up a number of clear and objective rules in your trading plan that you intend to operate under when trading. Ideally, these rules should tell you:

(1) What observables to watch for trading signals.

(2) When to get into the market.

(3) When to exit the market at either a profit or a loss.

(4) How large your trading positions should be.

The plan does not have to be complex, and you may find it considerably easier to maintain discipline and execute the trading plan if it has relatively simple rules.

Of course, you will want to write down each one of your trading plan rules in detail to provide you with something to refer to when you are trading. Many traders use a decision tree schematic diagram incorporating their trading plan's rules to assist them in making prompt decisions.

Time is Money When Trading Forex
Time really is money when it comes to trading forex, so you will need to be fully prepared to understand your trading plan's signals and execute them quickly when they arise.

Since the forex market often moves quickly, the importance of being able to make decisions rapidly cannot be overemphasized. You will basically need to be able to pull the trigger on any trade that your system signals as soon as possible in order to avoid missing valuable trading opportunities.

Many traders use a decision tree schematic diagram incorporating their trading plan's rules to assist them in making prompt trading decisions.

Money Management Considerations
Certainly, developing clear and objective trading signals is going to be an important part of your trading plan.

Nevertheless, another key part of your trading plan will need to involve having an appropriate position-sizing methodology and a sound risk-management strategy to keep losses at a minimum so that you can survive a losing trade to trade another day.

These important money management considerations need to form a part of just about any trading plan for it to have the potential for creating long term profitability for your trading portfolio.