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Before A Forex Strategy Matters, Build a Foundation

Just as the construction industry does not build windows before it builds walls, Forex traders should not risk capital before their trading plan is complete. Remember, each layer of foundation is needed before adding the next one; otherwise the ground work is not sufficiently stable. Your forex trading plan must build a foundation.

Part of that foundation was already provided in detail in previous articles. Let’s make a quick review.

1)      Expectations need to be aligned with real achievements. Find out more info here. 

2)      The 7 most important focuses of a trading plan. This article discusses the motivational driver, the current situation, your main SMART goals, sub-goals and evaluations in action plans, method of trading, non-breakable rules and playing out your edge (your daily routine).

3)      The first steps of the trading plan were discussed such as the motivational driver, the current situation (situational analysis) and the action plan to go forward (SWOT analysis).

Based on the above, you may have completed this list:

a)      Summarized your goals based on SMART criteria

b)      Summarized sub goals to reach the goals (also SMART)

c)       Formulated your motivation

d)      Summarized your current situation (capital, time, etc)

e)      Summarized your strength, weaknesses, opportunities, and threats (SWOT)

f)       Formulated your strategies for improving and capitalizing on SWOT

 

NEXT PHASE: THE TRADING DOCUMENT

Once the expectations, current situation, smart goals and sub goals, motivation, and action plans have been documented, then it is time to move forward to the “juicy part”: the trading document. This is actually where most Forex traders start developing a trading plan, but this approach runs the risk of a false start.

1)      In the trading document Forex traders focus on the strategy or strategies employed, the tools and indicators used in the analysis, entry and exit method(s), time frames, trend definition, filters, trade management, etc.

2)      In the Forex strategy section, there are 2 important parts:

  1. Each strategy has its own summary with specific rules, guidelines, risk parameters, money management, tools, indicators, trade management, entry and exit method(s), trade management, etc.
  2. If multiple strategies are employed, then the Forex strategy section should also mention the cohesion of those strategies, the risk parameters of all strategies, the advantages, and disadvantages. Or in other words, the document should, in essence, display the strategic vision of using multiple strategies.

 

PREP WORK

Before Forex traders dive into completing the trading document and the strategy section, it is important to realize that there is important preparation work needed. For instance, what sense does a strategy have if we don’t have a (demo) trading account? So here below is a list of the first 7 steps before strategy matters.

STEP 1) CHOOSING A BROKER

As the list of Forex brokers is quite extensive, choosing a broker is not an easy task. Here are important criteria for choosing a broker.

a)      Check review website that is known to provide a well-balanced opinion on various brokers. The best is to find a website that also lists pros and cons, besides the end grade or number.

b)      Ask other Forex traders which Forex broker they use and why, and which ones they certainly would not use and why.

c)       Testing the broker yourself via a demo and then via a smaller live account

 

Once you have a narrowed down list due to the above-mentioned action steps, then you would want to compare the offer of each broker. You don’t have to limit yourself to 1 as we mention in the next step. Some things to think of are:

1)      The spread difference on the EURUSD

2)      The spread difference on all majors

3)      The spread difference on all other currency pairs

4)      The commission level

5)      The execution of the platform (speed and consistency)

6)      The education provided

7)      There are a ton of other things to consider. Please click on this link to read other important criteria when choosing a broker: http://winnersedgetrading.com/choose-the-right-broker/

STEP 2) SETTING UP AN ACCOUNT

In this part, Forex traders need to make their decisions with regard to their accounts. Are you trading live already? Do you want to have multiple accounts? Are all accounts with the same broker? Here are the choices:

a)      Decide whether you want to trade with a demo and/or real account. It is possible to have both or even multiples of both.

b)      Decide whether you want to trade with one or multiple accounts. The recommended solution is to have multiple accounts to diversify risk, to attach one account to 1/2/3 strategies for better trade management, evaluation and tracking purposes, and general testing of new ideas (on demo or small account).

c)       Depending on the number of accounts, spread the accounts on 2 or more brokers.

d)      Decide at what point to switch from either demo to real account (if trading is going as targets or better) or from real to demo account (if trading is not going as planned and/or targeted).

e)      Decide what starting account balances, minimum and maximum (when to withdraw) account balances, and what kind and how many strategies per account will be choices that need to be made (not only once but also as a Forex trader progresses forward).

STEP 3) CHOOSING YOUR CHARTING PLATFORM & GETTING FAMILIAR WITH A PLATFORM

One of the choices a Forex trader needs to make is which platform to use. Some brokers offer one type of platform, which makes the process easy, but some brokers offer various choices such MT 4, MT 5, Ninja trader, their own custom made software, your own private choice of independent software, etc.

A Forex trader needs to find a platform that works well for them, that is easy to handle, that makes trade management and execution comprehensible, that provides the standard technical analysis tools, that provides for charting possibilities, etc.

It is very important that a Forex trader becomes familiar with the chosen platform and understands the basic functions such as where are the indicators and tools, where is the trading history, and where can the visual aspects of the chart be found. A trader also wants to trade on the demo account for a while to fully understand the trading process of the platform.

STEP 4) CONNECTING YOUR ACCOUNTS WITH MY FX BOOK

For the ease of tracking purposes and compiling data on your trading account, it is recommended to connect your account to myfxbook. This way keeping track of the history and other key statistics becomes a lot easier. Myfxbook will monitor performance per strategy, risk management details such as draw down, money management details such as average win and loss, graphs, etc.

 

STEP 5) HAVING PROPER DOCUMENTS FOR TRACKING RESULTS AND EVALUATIONS

The myfxbook link does not take away the importance of saving your own documentation, tracking, and evaluation. A Forex trader wants to save all trade statements for instance. A Forex trader also wants to record, update, monitor, and save all of the trading results in their accounting method. Any evaluations of the trading performance should also be kept. You can either create your own tracking tool or buy one from an external source.

STEP 6) UNDERSTANDING WHAT A STRATEGY IS AND WHAT A SETUP IS

A strategy is a means for identifying and capitalizing on trading opportunities. It is a means for finding trading opportunities but does not represent the total trading plan. In the next week few weeks we are going to focus on the strategy side of Forex trading, but often traders assume that this is the same as the trading plan. It’s not. The strategy section is in fact only part of the entire trading plan.

forex trading plan

Every strategy will have its ups and downs, its winning and losing streaks, its average reward to risk, etc. It is the job of the Forex trader to maximize the potential of the strategy by following the forex trading plan.

These ups and downs will cause performances to have variations within weeks, months and quarters. Although it is vital to have end targets, Forex traders need to be prepared for the fact that results will progress at the same rate the entire year.

Always remember, forex traders should not risk capital before the trading plan is complete. Before a forex strategy matters,  you must build a foundation. Thanks for tuning in! If you want to ask us anything about the above-mentioned topics, please let us know down below!

Good Trading!

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About Louie Lewis

Louie Lewis
Successful forex trading starts with you first. Then comes the actual strategies and techniques. I have been involved with forex and forex trading for a few years now. It is a wonderful way to build wealth. The learning never stops and I want to help others along their journey into this wonderful market of opportunity.

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