What is a currency investment trading plan?

The forex trading plan is an action plan that provides precise details on the strategy and key elements that will be used in order to invest without leaving room for improvisation.

A serious trader simultaneously uses three different systems: A forex trading system, a risk management system (money management) and an emotion management system.

Each system consists of its own sets of rules (trading signal descriptions, specific conditions or actions that must be performed). In order to be effective and rapidly verified, these rules are summarized in the form of a list of instructions (a checklist) that are easy to follow and which fully govern 1) the trading process by including control of both entry and exits (the forex trading system), 2) lot sizes in relation to stop loss/take profit levels and the account’s available funds (the money management system) and 3) the trader’s emotional state in order to prevent human error (the emotion management system).

The trading history should be recorded in a trading journal in order to be studied later so as to improve the systems.

The main sets of forex trading rules

The forex trading system contains the rules which describe the technical and/or fundamental signals, as well as the right time to initiate and close trades.

The money management system contains the rules which define the maximum risk to be taken with regards to the available capital in order to the determine the lot size and the number of positions.

The emotion management system contains the rules and methods needed to reinforcea forex trader’s positive emotions and weaken his/her negative emotions.

The checklist

The trading system checklist describes the conditions of trade entry and exit (i.e. the convergence of technical or fundamental signals which justify the opening or closing of a position). For example, if the set of rules pertaining to a forex trading system require that one enter a trade when the 20-day moving average crosses the 50-day moving average, the checklist will consist of the following question: “is the 20-day moving average approaching the 50-day moving average? If yes – prepare to enter a trade, if not – watch the market”.

The money management system checklist contains instructions which help one verify whether the size and the number of positions comply with the maximum risk defined by the strategy, according to the stop loss and take profit levels.

The emotion management system checklist contains instructions which help prevent the errors of judgment related to a trader’s psychology. A good trading system cannot be rigorously applied by a trader who is subject to negative emotions (in times of losses or profits). For example, the checklist can contain the following question: “Am I angry when the stop loss is hit? And if so – I should remember that losses are part of trading and are inevitable”.

To make money with forex trading, the three trading systems must work in harmony with each other. Forex trades can be executed provided that there is no conflict between the instructions contained in the three checklists.

In the best of cases, these checklists must be continuously visible to the trader, it will not be effective if they are kept in a notebook that is never consulted. It’s worth mentioning that the emotion management system is not really necessary when the trading is fully automated by an expert advisor.

The forex trading journal

The reliability of a strategy is measured over a long series of trades. All of the information pertaining to the trades that were executed on the exchange must be recorded in a trading log. The idea is to take a step back after the markets have closed in order to analyze the trades and improve the strategy.

A good forex trading strategy is constantly evolving in order to adapt itself to current market conditions. Furthermore, keeping a trading journal empowers a trader by forcing him to adopt a professional approach to currency trading.