Forex Trading Plan Preparation, A Complete Guide
This detailed article will show any forex trader how to prepare a written forex trading plan for any currency pair. We will discuss trading styles, time frames, and the elements of any good trading plan. We will also explain what trend indicators to use, what analysis technique to use, provide illustrations and offer several example forex trading plans to see.
Why Would I Write a Forex Trading Plan?
Traders should always have a trading plan handy. They need to have a written document showing them the current condition of the market. Traders need to know what pairs are trending up, what pairs are trending down, whether or not the market is ranging or cycling up and down, or if the market as a whole is choppy and difficult to trade.
Traders can assess the entire market and they will know what currencies are strong or weak, what important economic news drivers are on the horizon to possibly drive strong movement, and where critical breakout points are for lower risk trading.
Traders without a trading plan are taking on additional risk, and this is not necessary. Trading without a plan is like driving 1000 miles in the dark without a road map, compass or GPS system, you will be lost. Having a daily forex trading plan for 28 pairs is how we operate at Forexearlywarning. We want all traders to build a good habit by preparing a daily forex trading plan for the pairs they would like to trade.
Currency Pairs To Write Trading Plans For
There are two approaches, one approach is to write a trading plan for the same pair over and over. The second approach is to review 8 currency groups and 28 pairs thoroughly and pick the best opportunities.
We use the second approach at Forexearlywarning. We perform a thorough analysis of 8 currency groups and 28 pairs every day, then we pick the best trends and the pairs with the highest pip potential, our daily forex trading plan is based on this. We also notify traders when new trends are starting so they have solid risk reward ratios and can trade trends early in the trend cycle. If the market is choppy or has no opportunities we also know this as well. Forcing trades into the same pair over and over again can ruin your trading completely. Once you have performed a total market analysis and seen the opportunities in the market versus trading one pair repeatedly, you will never go back to trading one pair again. Logically, trading 28 pairs will give you substantially more pips and opportunities than trading just one pair. This cannot be argued.
When you focus on one pair like the EUR/USD and trade it every day it may be very choppy or non trending and you still force the trades, meanwhile other pairs are screaming ahead in solid up trends or downtrends with great entry signals. Always trade the best opportunities in the market, we will show you how to find them every day with the procedures below.
Trading Style For a Forex Trading Plan
In this article we will teach you how to prepare a forex trading plan for a minimum duration of swing to position forex trading on the H4 time frame, and also for trend trading on the D1 and W1 time frames, with guidance from the MN time frame.
By focusing on preparing trading plans for the higher time frames we will always keep our money management ratio in order. Money management ratio is the number of pips you might make versus the number of pips you risk. Money management ratios for swing trading the H4 time frame can be around +3 to 5 to 1 positive money management ratio, which is excellent. Money management ratio on the D1 and W1 time frames can be +5 to as high as +50 to 1 positive money management ratio. Since we are preparing forex trading plans for 28 pairs, opportunities to plan trades on the higher time frames generally comes about almost every day. We can point you to the great article about forex trading styles so you can learn more about swing trading on the H4 time frame.
A few notes about scalping. Scalping the forex is bad from many standpoints: the money management ratio is bad or negative, it is a defense mechanism for not having a trading plan. It is not necessary to take risks trading this way, and it indicates that a trader has no real strategy. Scalping represents ignorance on the part of the trader and the vortex of problems forex traders face daily with technical indicators, and this article will not have any focus on this bad trading style.
Traders Challenge, Write A Forex Trading Plan Every Day
At Forexearlywarning, we are aware that some forex traders will never prepare a trading plan as long as they trade, this is why we have been in business 11 years writing trading plans for traders. We also know that many forex traders take short cuts because we see the indicators and scalping that are prevalent among retail traders. But we also see a handful of traders who want to analyze the market and truly enjoy doing so. For them, we suggest preparing your daily trading plans and compare your trading plans to ours every day. This can be an ongoing mentor program. For the rest of you it is okay to use our trading plans until you get the proper mindset to start doing it yourself, or until you have time in your schedule. Forex traders who prepare daily trading plans are part of an elite group. We suspect that less than 1% of traders have a written plan in front of them every day, and the results and ensuing lack of success are predictable. Establish a daily routine of writing your plans at specific times.
Forex Trading Plan Contents
A forex trading plan can be simple, straightforward, short and unambiguous. Some of the Forexearlywarning trading plans are less than 15 words long and still give you everything you need. All trading plans should give you the pair, the direction of the trend, and the larger time frames you are trading. A good trading plan would also let traders know what pairs might be forming a new trend, for much improved money management on any trade entries. Trading plans should also give price alert points for traders to set audible price alerts, so traders are notified of price movement. A good trading plan should also have a listing of the economic news drivers that could affect trading, these news drivers are visible on our world news calendar for all 8 currencies we trade.
Other information that a trading plan might have is a price target for some profit taking, and, if appropriate, additional language about the condition of the overall market. Mentioning that the market is choppy is good in a trading plan so traders are aware and more careful, or mentioning that the market is oscillating or ranging on a certain time frame is also very useful.
Finally, a trading plan should have the criteria for entering the planned trade. We do this with our powerful entry management tool, The Forex Heatmap®. If we prepare a buy plan for the GBP/USD, for example, when the audible price alert hits, simply check the heatmap for trade entry verification.
Indicators to Use For Your Trading Plans
Since our trading plans are trend based, some exponential moving average forex trend indicators should work just fine. Set up the the indicators up by individual currency. For example set up all of the EUR pairs together to see if all of the EUR pairs are in up trends or downtrends, and repeat this process for all eight currencies we track. We have a set of informative forex videos to show any trader how to do this.
When you review each currency pair and group of pairs you will write down your observations. The current market condition will begin to become obvious. You will see what pairs or groups are trending, choppy, consolidating, at support or resistance, inside support/resistance zones or clusters/layers, along with knowing what currencies are strong or weak. Your analysis consists of cycling through the pairs and time frames and observing and gathering market information pair by pair, individual currency group by group. Your informal written notes can be re-written to formulate your final forex trading plan.
Analysis Technique For Preparing a Plan
The market analysis technique we will use to prepare our daily trading plans is called multiple time frame analysis (MTFA). Along with MTFA of trends you should simultaneously analyze support and resistance levels using multiple time frame analysis simultaneously as you inspect the trends. You inspect the smaller time frames to determine price alert points, and the higher time frames to determine the major trends and price targets. A more detailed discussion of multiple time frame analysis is in our education lessons.
The MTFA should be conducted by currency group. For example all of the USD pairs should be analyzed together using MTFA, then all of the CHF pairs, then all of the GBP pairs, then all of the JPY pairs, etc., continuing through the 8 major currencies. We will analyze the eight major currency groups, each pair within a group, then group by group, in the plan development process and the complete list of pairs is below. Doing it this way allows you to see what individual currency is strong or weak so you can more effectively draw up your plans. You can use our handy forex market analysis spreadsheet to assist you with taking this information and converting it into a final written forex trading plan.
Steps For Preparing A Plan
Step 1 – Read this article carefully several time and become familiar with multiple time frame analysis, there is a link to an article about multiple time frame analysis above.
Step 2 – Drill down the charts with multiple time frames, always inspect the largest time frames first, i.e, H4, D1, W1 and MN time frames on each pair. Repeat this across 28 pairs on the market analysis spreadsheet. Build consistent habits of doing this.
Step 3 - When drilling down the time frames, make sure you are doing this in groups. Group all 7 USD pairs together, then all 7 CHF pairs together, etc. Do this for all 8 currency groups, USD, CAD, CHF, EUR, GBP, JPY, AUD and NZD. You have to review each currency pair twice, because each currency pair has two sides and will appear twice during your market review. For example the EUR/USD should be reviewed with the EUR pairs review and then again with your USD pair review. This is how you prepare a forex trading plan by individual currency. The image below shows how to set up all of the USD pairs side by side for easier analysis of the USD, next you set up the JPY pairs side by side, then the CHF pairs side by side, etc. through all 8 major currency groups.
Step 4 – When you drill down and inspect the top 4 largest time frames, you need to observe the overall shapes and structure of the charts with some emphasis on the most recent time frames and determine which pairs are trending or oscillating (ranging), consolidating and retracing, in tight ranges, smooth cycles or choppy movements. Trending means that the H4 chart at a minimum or better yet the D1 or W1 time frame is in an established trend or about to start one as the green and red lines intersect. The H4 time frame trend would be for swing traders, the larger time frames would be for trend and position traders. An oscillating pair is one that is cycling up and down in a range between support and resistance on the H4 time frame or larger.
Look at the images below, a new uptrend is starting on the D1 time frame, you can set an audible price alert at 1.0400 and this qualifies as a forex trading plan. Also you know you have around 225 pips of upside potential. The second image is an example of an oscillating pair with smooth cycles, you can write profitable trading plans for these pairs also.
Step 5 – Conduct a parallel and inverse currency logic check when preparing a forex trading plan. As an example if you execute steps 1-4 and you determine that all of the JPY pairs are in downtrends, then; clearly, the JPY is strengthening across the board and its best to plan in that direction. After you determine what is going on with the larger time frames in the JPY group, if it makes sense, go ahead and look at the smaller time frames and intraday support and resistance numbers to estimate your audible price alert points. Set your trading plan in writing from there. Similarly if you review all of the JPY pairs and none of them are trending, they are all oscillating in tight ranges and choppy, you could just choose to not prepare trading plans for any of the JPY pairs. Repeat the process for all 8 currencies. Don’t over complicate this incredibly straightforward way of thinking about how the forex works. Do not have a predetermined bias towards a pair, just let the charts tell you the story.
Step 6 – As you are reviewing the time frames in steps 1-5 you should also simultaneously be checking areas of support and resistance on the time frames as well. In the example we used above if all of the JPY pairs are in downtrends you can now check the smaller time frames on these pairs for intraday support levels to determine the audible price alert points on these pairs. The audible price alert points become part of your written plan. Learn to pick up clues as you observe the charts and time frames and jot them down in your notes and rough plans, learn to be a good observer and detective, experience helps.
Step 7 – Check the forex news calendar for the currencies you will be trading and install these into your trading plan. news items can move currency pairs with the trend or against it on a short term basis. World economic news calendar drivers that are regularly scheduled for the upcoming main trading session that could affect market movement and cause volatility on the eight currencies we trade are easy to check and part of our planning process.
Step 8 – Estimate risk reward ratio. If you are planning a buy on the AUD/USD and the next major resistance is 150 pips away, and your initial stop is 30 pips, your risk reward ratio is +5 to 1, which is excellent. If your risk to reward ratio is too low just don't trade, and make this decision up front. If a larger time frame is starting a new trend, the risk reward ratios can be as high as 50:1 positive, which is phenomenal in favor of the trader. Knowing the pip potential of a trade before you enter is part of the forex trading plan preparation process.
Step 9 - Rewrite your notes formally and this qualifies as a plan. You will be surprised how the charts are trying to tell you something every day you just have to become adept at listening to and interpreting what the charts are screaming at you. Open your eyes and soak it in.
The market is dynamic, things can change, trends can start from nothing, trends can end today, some pairs can consolidate for days. Take pride in your plan writing skills, very few, if any, forex traders even try to write plans. You are in a class by yourself. Don’t treat writing trading plans like it is work if you enjoy what you do it’s not work at all. If writing plans is hard work for you or stressful then it is time to follow someone else’s plans and you can still try to write your own plans at some point in the future.
As a forex trading plan writer you basically have two modes of operation, The first mode is the analysis mode where you are thoroughly analyzing the market using the techniques described in this lesson. The second mode is the entry mode when you are done with the analysis and monitoring the market and looking for an entry point for possible execution of your plans. At this point your plans are finished and you are monitoring the main trading session, strong news drivers and price alerts to hit to see if there are any valid entries today..
Best Time to Write A Trading Plan
The best time to plan your trades is several hours ahead of the start of the main trading session when all of the pairs are consolidating. A trading plan should be completely finished several hours ahead of the start of the main trading session. The main trading session starts about 4-5 hours before the US stock market open until about 1 hour afterward. Most sustainable forex trade entries occur during these times.
The forex market essentially has two trading sessions, the Asian session and the main session which is the combined European and US session. 80-90% of strong and sustainable entries are in the main trading session. The main trading session is by far the best time to enter trades. Some pips are also possible in the Asian session but forex traders need to learn how to trade the forex in the main session first because this is where they will succeed.
It is also possible to do some planning ahead of the Asian session. The procedure is roughly the same and you would check the trends following the same seven steps listed above and check to see what pairs could be trending or oscillating. An example is if the NZD has an interest rate decision coming in the Asian session and the NZD pairs are clearly trending or oscillating you certainly can write a trade plan towards that. Asian session currencies are the NZD, AUD, and JPY. After you have been trading the main session for about a year successfully then you can start to prepare plans for the Asian session, that is the right experience level.
Example Forex Trading Plan
Trading plans should be simple, unambiguous, and should be easily verified by any intermediate level forex traders using a simple set of trend indicators like the ones we use every day. A Forex trading plan must be fully defensible by the larger trends, time frames, and support and resistance levels of the market. Each plan should have price alert numbers in writing as well as an entry management criteria in the plan.
Example Trading Plan #1
All of the JPY pairs are in intermediate term downtrends, the EUR/JPY is sitting on an intra-day support level just above 140.00. Set an audible price alert at this price and when the alert hits in the main session verify your sell entry with JPY strength or EUR weakness.
Comments: This is a simple and unambiguous plan and anyone who reads this plan should be able to verify the trends on the JPY pairs and the 140.00 support level and alert point in about 2-3 minutes by looking at a few charts. It should be completely logical as to why you are considering this sell trade entry. You also know that it is an intermediate term trend so you should be able to hang onto the trade for as long as a few days or possibly weeks.
Example Trading Plan #2
The USD pairs are all oscillating and ranging on the H4 time frame. The pairs are stalling at support and resistance now and they could start to move in the main session based on USD strength. Set an audible price alert on the GBP/USD at 1.6450 and when the price alert hits monitor the market for USD strength with the Forex Heatmap®. There are also news drivers in the main session from the GBP and USD that could trigger the movement.
Comments: Once again this plan is simple, its also logical. The plan is short and compact but it can easily be verified by some chart inspection in a few minutes by any intermediate level trader. We also have many more examples of forex trading plans like these two for you to check out. We also have a 6 minute video that will show you a sample of how to write a forex trading plan for one group of pairs, so you have a model plan.
Setting Your Forex Trading Plans in Motion
After you learn how to prepare a forex trading plan you must then start executing the plans with demo and live trades. You start by demo trading, then you move to micro lot trading with stops, then mini lot trading, then ramp up to full scale trading over time. It is a step wise process. You can take a small account and build it up over time while learning to manage profits and exits.
Our trading plan process includes setting up audible price alerts on each pair you are planning a trade for. When the price alerts and forex news drivers start hitting in the main trading session, you can start to demo trade daily. But how do you verify your trade entries?
With our trading system we put traders at a huge advantage with verified trade entries into their planned trades using our visual map of the forex market called The Forex Heatmap®. This is a real time entry management system that is available to all traders. It is not that difficult to learn how to use and it works across 28 pairs in two directions. This snapshot is a portion of The Forex Heatmap® that depicts a real time buy signal on the GBP/CAD plus other GBP pairs.
So if you have a written forex trading plan in place to buy the GBP/CAD or othe GBP pairs, when the audible alert hits you can verify the entry into your planned trade with the heatmap. Having an entry verification system tied to your trading plans will give you the lowest risk way of trading the forex available anywhere. The price movement on the GBP/CAD alone is 150 pips in this example, in one trading session, This is what traders are looking for.
Developing Your Trading Writing Skills
It takes time to learn how to prepare a daily forex trading plan using these techniques. There needs to be a way for traders to prepare a daily trading plan and then check to see if they are doing it correctly. Here is what we suggest: Write your own daily trading plans then compare them to the published plans we have on our website. This way you can check your daily trading plans against our professionally written plans. We have been in business for years and we know how to do it. It will not be the best experience at first but you will keep improving until it is second nature.
To our knowledge this is the only way to get better at writing trading plans. We have not been able to locate any other forex websites that prepare daily trading plans, most forex traders are stuck using technical indicators and crappy robots that lose money. The forex industry has no focus on trading plans, we have been providing daily trading plans for 28 pairs for many years.
Conclusions - Only a tiny number of forex traders use a daily forex trading plan. This is sad, but with this article and the exact methods we present, this problem can be fixed. If you review 28 pairs daily you will find trending pairs regularly on the market. With our focus on the higher time frames pips will most often be available to capture. Plan your trades, know what pairs are trending, set the audible price alerts, watch the news calendar, etc, and be an informed trader. With great tools like The Forex Heatmap®, we feel as if executing your trading plans for a profit is a very high probability.