Planning and Record Keeping in Forex Trading

Before you make your first online trade, you should spend some time preparing a trading plan. The trading plan is one of the key components that successful traders use – and one that unsuccessful traders often ignore. To be successful in online Forex trading it is important to make rational decisions and carry out trades for a reason. A trading plan can help you to take the emotion out of trading and instil discipline in terms of risk management and control of your money. Equally important is the keeping of accurate records of your trading and the analysis of those records. This article addresses these points in the following three sections :

  • What is a Trading Plan?
  • Trading Plan Objectives and Goals
  • Recording and Analyzing your Trades

What is a Trading Plan?

No successful business owner would expect to launch a business without first preparing a business plan and the same principle applies to Forex trading. Whether you are trading full time or part time, it is vital that you treat your trading as you would a business and make a plan for how you are going to trade and achieve whatever it is that you want to achieve. Your trading plan is personal to you and should lay out in some detail the methods you plan to use and the schedule you expect to keep.

Forex Trading PlanA trading plan is not the same as a trading system and shouldn’t just be an outline of what trades you plan to make. It should be about when you will trade, what strategies you will use, how you will manage risk and how you will control your budget. There should be five main considerations in your trading plan; your trading schedule, market research and analysis, risk and budget management, criteria for trades and objectives and goals.

The trading schedule aspect of your trading plan is relatively straightforward. In this you should simply lay out when you will be actively carrying out trades. The Forex market is open around the clock so there is plenty of flexibility in when you can do this, but it should be clearly defined. It doesn’t matter how many hours you expect to be trading for, you should have a schedule that you stick to. Your trading schedule should also allocate some of your time to market research and analysis.

It is essential to dedicate some time to market research and analysis if you are to be successful as a Forex trader. Many new traders make the mistake of going to extremes when it comes to research and analysis; some spend far too little time on it and make trades based on instinct or guess work while others spend too much time on and suffer from information overload. Your trading plan should outline how you will spend your time, and what sources of information you will study. The plan should also lay out what forms of analysis you will carry out – fundamental analysis, technical analysis or a combination of the two.

The Forex trades that you carry out should be partly governed by your attitude to risk and this is something that should also be addressed in your trading plan, along with how you will manage your money. You may decide that you prefer to make speculative trades with high potential gains but high potential losses in which case it would make sense to risk only a very small percentage of your budget on each trade. You may plan on making several safer trades in which case you could risk a bigger slice of your money per trade. There is no right or wrong when it comes to attitude to risk, what is important is that you manage it correctly and have the discipline to stick to your plan. Your trading plan should also define when you will use stop losses and how you will set your stop prices.

Your trading criteria should be a well thought out aspect of your trading plan as it is obviously very important. Successful traders don’t just make random decisions about what to trade and when, they have clearly defined strategies that they use for identifying opportunities and taking advantage of them. There is no guaranteed recipe for success in Forex trading, but your trading plan should include information about how you will decide when to enter a position and when to exit it.

Trading Plan Objectives and Goals

Including your objectives and goals in your trading plan is vitally important, as this will help you stay focused on what you are trying to achieve and can help you stick to logical decisions when your emotions threaten to take control. Ultimately, of course, the aim in Forex trading is to make money but your goals should be better outlined than that.

When planning your objectives and goals you should think carefully about both your short term and long term aims. Many people start out Forex trading in their spare time, with a view to progressing to full time trading when they can afford to leave their job. Where this is the case, you would need to have clearly defined targets for the point at which you plan on going full time –such as how much money would you want to have saved up and how much money you would need to make a monthly basis.

If your plan is to trade Forex part time to supplement your main income, then you still need to have some defined goals. For example, you should have a target for the amount of profit you want to make in a week. You could also plan to reinvest any profits you make into your trading bankroll and steadily increase the value of your trades or you may to decide to stick to level trades and take out any profit as a supplementary income.

As with all aspects of your trading plan, your objectives and goals are about your personal choices. It does not so much matter what it is you want to achieve out of your Forex trading; what is important is that you define your objectives and stick to your plan for achieving them.

Recording and Analyzing your Trades

Record keeping in Forex trading is just as important as your trading plan and can greatly increase your chances of success. Ideally, you should keep some form of diary or journal to record all the trades you make and their results. By analyzing your records over time, you can look for ways to refine and improve your trading plan for better results.

Your trading journal should be an accurate record of every trade you make and needs to include the following information:

  • Your reasoning behind the trade
  • The value of the trade
  • Your exit strategy for the trade
  • Your expectations for the trade
  • The results of the trade

Recording the relevant information at the time of entering a trade helps you take a measured approach and ensure that you are making the trade for valid reasons – which should be in accordance with your trading plan. Over time you will build up a range of data as to what prompts you to make a trade and this can be compared to your results to see which strategies are working for you and which strategies can be improved upon.

You can also use the information from your records to produce certain statistics about your trading, which can also be helpful when analyzing your trading history and looking for ways to improve. The following statistics are all useful to know:

  • Win Rate – The number of successful trades expressed as a percentage of all trades
  • Average Profits – The average profit of all successful trades
  • Average Losses – The average loss of all losing trades
  • Net Profit – Your total profits less any costs you incur
  • Top Currencies – The currency pairs that give the best win/loss ratio and/or the most profit
  • Top Indicators – The signals used to make decisions that have the best success rate

By maintaining accurate records about all the trades you make and your reasons for making those trades you can create a clear picture of how successful you are. More specifically, you will be able to highlight those strategies are working out well for you and those that are less effective. This allows you to review your trading plan and make adjustments where necessary. A solid trading plan and well-kept records can be used together as a powerful tool in your online Forex trading endeavors.