How to Create a Precise Forex Trading Plan: Step-By-Step Guide - Trading Heroes (2024)

A trading plan is vital to your success as a trader because it gives you a set of proven rules to follow, even when your emotions are trying to make you trade impulsively. But how do you actually create a trading plan for Forex trading?

Good question.

In this post, I will show you exactly how to create a trading plan, even if you have never done it before. I've added a few additional tips after the video, so be sure to read on.

You Don't Have a Trading Plan If…

Some traders think that they can just copy a tradingstrategy from a forumand BOOM…they have a trading plan.

Far from it.

You do not have a trading plan if you have ever said any of the following:

• “I trade on instinct.”
• “I look for strong trends and jump on them.”
• “I trade fundamentals.”
• “I look for trend reversals.”

Now don't get me wrong…any of these statements could have a solid trading strategy behind them. But if your entire trading strategy consists of these statements, then you are in big trouble.

So if you need a real trading plan, here's what to do next…

Write Down Your Plan

This is the biggest step to creating a trading plan…that actually helps you trade better. So many traders keep their trading system in their head, then wonder why they are indecisive and stray from their rules.

Write it down and it will always be there in black and white, for you to reference later. I prefer to start out by actually printing out the Strategy Development Worksheet because it is easier to take notes and write out 2 or 3 systems to test, at a time.

From there, then I write down the final system in Evernote.

Do whatever works best for you. If you want a ready-made worksheet, then you can download the one I use.

Strategy Name

First, give your strategy a name. This might sound a little weird, but it will help you track the development of your trading method later.

Name it whatever you want, or simply use the original name that came with the course you learned it from. The only thing that matters is that the name makes sense to you.

So feel free to get creative. 🙂

Strategy Version

Next, you want to version every single change that you make to the original trading plan. I use version 1, 2, 3, etc., but if you want to get crazy and do 1.1, 1.2, 1.3, etc., then go for it.

This will help you isolate what is working and what isn't. Remember to change one thing at a time and change the version number with every change.

Example

Let's say that you that you have the following parameters in your trading plan:

• 1% risk per trade
• Exponential Moving Average (10)
• Exponential Moving Average (20)
• One position, one profit target at 1R
• Stop loss on the other side of the entry candle

Then you change it to:

• 1% risk per trade
• Exponential Moving Average (10)
• Exponential Moving Average (20)
• One position, one profit target at 2R
• Stop loss on the other side of the entry candle

That is when you would change your version number. After that, you might consider changing your parameters to:

• 2% risk per trade
• Exponential Moving Average (10)
• Exponential Moving Average (20)
• One position, one profit target at 1R
• Stop loss on the other side of the entry candle

Yeah, change the version number again.

You get the idea.

Currency Pair(s)

Then you need to write down which currency pairs you have tested. Not all trading strategies will work on all currency pairs, so it's important to test one at a time.

Start with one pair. Write it down, then record the results.

Test the next pair, do the same. This process will help you understand which pairs are safe to trade and which ones you need to avoid.

Indicators Used

Now it's time to record any indicators that you will be using with your trading system. Also be sure to record thesettings that you are using.

It can be easy change settings mid-testing, then not know which setting worked best. So write it down, follow the plan, and you will know exactly what is working and what isn't.

If you are doing pure Naked Trading, you can leave this section blank.

Example

• RSI (14)
• Exponential Moving Average (10)
• Exponential Moving Average (20)

Download the Worksheet

Click this button to get the PDF:

Primary Timeframe

Which timeframe have you actually tested this trading method on? Don't write down 5 minute, 1 hour and daily, if you have never tested your system on any of these timeframes.

The course you bought may have told you that a strategy will work on any timeframe, but test it yourself.

Never trust your money to hearsay. Test one time period at a time and get statistics for each one.

Entry Signal

How will you enter the trade? This can be more complex than it seems, but the more exact you can define your entry, the more consistent your results will be.

Remember to note the following rules for your entry:

• The exact conditions that will determine your entry
• Any reasons that you entry might become invalid
• External conditions to consider, such as related markets or news events
• Time of day that you should/shouldn't be trading
• If it's better to only go long or short with a certain currency pair

Once you have your entry mapped out, it's time to write down some other important parts of your trading plan.

Stop Loss

Where will you place your stop loss? Will it be above/below the current candle?

Is it a certain number of pips?

Detail your stop loss in this section and draw diagrams, if necessary.

% Risk Per Trade

This is really important. The same trading system can behave very differently when you risk different amounts per trade.

I would recommend starting off with 1% risk per trade, thentest less ormore risk, to see what suits you best. Remember to change your version number every time you use a different amount of risk.

Keeping your risk the same for every trade makes it much easier to handle the drawdowns and diagnose issues, when your trading isn't going as expected.

When to Take Partial Profit

If your trading plan includes taking partial profits when price starts to move your way, then note that in this section. Again, be as specific as possible.

Some common places that traderstake partial profits are:

• When the trade reaches 1R or some multiple of the amount risked
• At a short-termsupport/resistance level
• At an indicator like a moving average

What you must avoid is setting a partial profit target based on “feel,” instead of definable rules.

When to Move Stop Loss

Do you want to move your stop loss to breakeven, to lock in a trade that is moving in your favor? This works for some traders and not for others.

But this is certainly something to consider.

When to Add to Position

Are you going to pyramid your trade by adding positions after the initial entry? This might not be your style, but if it is, be sure to note your add-on strategy here.

Be sure to clearly define exactly when you will add to your position and when you will not. Drawing a diagram usually helps.

Should You Re-Enter if Stopped Out

This can be an important rule to keep your sanity and your trading account. When youare convinced that you are right about a trade and it doesn't work out, it can be tempting to re-enter the trade again and again.

…and again.

When you limit your re-entries beforehand, you keep yourself out of trouble. I personally use the Two-Strikes Rule.

Figure out what works best for you.

Exit Signal

Now, how do you cash in your entire trade? There are many ways to take profit, but here are a few that traders use:

• Risk multiples: 1R, 2R, etc.
• Next support and resistance level
• A Fibonacci extension level
• An indicator, like the Parabolic SAR

Like with partial profits, clearly define your exit signal and don't leave it up to your “gut.”

Other Considerations

If there is anything that I missed above, put it into this section. There is always some special circ*mstance that traders need to have in their plan, so I made a space for it here.

This could include markets to check before you start trading and any pre-trading routines that you should go through. Yes, writing that stuff down on every test could get repetitive. But it will burn it into your brain 🙂

Test Your Trading Plan

Alright, now that you have a trading plan written down, that's just the first step…you aren't done yet! Now I'll briefly get into what you will need to do to after you have a plan.

Since these steps aren't the primary focus of this post, be sure to reference the links provided below.

Before you actually trade your kick-ass trading plan with live money, it's time to test it out in backtesting to find outwhat you can expect. Never trade a plan with real money, unless you know it has a good chance of working out, by testing.

After you have backtested it, you also have to forward test it. This will show you any differences between your backtesting and live market conditions.

If your system performs as expected, only then should you move it into live trading.

Rework Your Plan (If Necessary)

A trading plan that looks promising in testing may not actually work well in real trading. This is usually because trading real money has a drastically different psychological profile, compared to trading play money.

So at this point, you may want to rework your plan to make it friendlier in live trading.

Track Your Results

Another important stepafter creating a trading plan is to track your results. You should start with a trading journal, like this.

But you should also have a way to get live stats on your trading. One of the easiest ways to do this is to use MyFxBook.

This will allow you to compare your testing results with your live results.

Possible Improvements to Test

Even when you have a system that works in live trading, you aren't done with your trading strategy worksheet yet! Keep it around because you want to record any ideas that you may have for improving your trading method.

You might want to test a bigger profit target. Or you may want to testan entry on a lower timeframe.

Most traders will have some ideas on how to improve their trading system. But instead of trading the idea right away, simply write them down and go through this process again.

Conclusion

So that is how you create a trading plan. There may be other things that you want to include later, but the plan outlined above will get you started.

Test your plan and follow it. This can be hard to do, but figure out how to get yourself to stay with the program. You may want to tape your plan to your computer screen,keep a notecard on your desk or put it on the home screen of your phone.

Happy trading!