We have discussed about how important this is but exactly how should it be structured? We advise you use all these points as unofficial subtitles and try to include an answer to all of them in your plan. We know it seems quite involved and detailed but believe us when we say it is worthwhile and then you know you will have a comprehensive guide to your short and long-term trading career.
A good FOREX business plan consists of: a main plan, a system plan, a trade and risk management plan and a money management plan.
A main plan describes your main objectives and makes an “inventory” of where you are at the moment. It also helps you to handle unforeseen complications. The other components of the business plan describe how you are going to accomplish your goals.
What is your main goal?
Are you trading for wealth creation? Or are you looking to sustain yourself (main income)? Diversify? Or any other reason. What is important here is to describe your main goal in tangible terms.
How long have you been in business?
Describe how long have you been trading or studying the Forex market and how did you start up.
Where are you now?
Describe your level of development at the moment. And things you have to work on in order to accomplish your goals
How much risk capital do I have? Can you afford to lose the money in your trading account?
If you are looking to trade for a living: You must be realistic about this one; it is not easy to make a living trading the Forex market or any other financial market with a $10,000 trading account. (Read the following question).
If you are only trading to get some extra-income, wealth or to diversify: then you can devote any amount of money to your trading account, but then you also need to be realistic about the returns wanted.
How much money do you need to live on each year? Do you need to live off your trading profits?
This question is only for those that are looking to trade for a living. If you have a $10,000 trading account and you need $60,000 a year only to survive, then you require 50% of return on a monthly basis only to survive, but remember you need to grow up you account, so this would be totally unrealistic. On the other hand, if you have a $100,000 trading account, then you only need around 5% on a monthly basis to survive and a little more to let your trading account grow.
If you are looking to trade for a living and have a small trading account then I suggest you to wait until you have more risk capital, otherwise psychological factors will play an important role in your trading performance at the end of the month if you are not close to your monthly target. This will make you take uncontrolled risks, which will lead you to possible failure.
How much time during the day I have to devote to trading? How much time will I devote to analyze my trades?
The amount of time you have available to trade will dictate the kind of trading you are going to adopt (daytrading, position trading, etc.)
What are your strengths and weaknesses in relation to trading? How are you going to deal with your weaknesses?
Are you disciplined? Feel bad about losses? Also what steps are you taking to overcome your weaknesses and maximize your strengths?
So far we have put attention on your main goals and where you are at the moment, the following sections describe how are you going to achieve your goals.
What is my deadline?
To answer this question you need to answer the following questions:
In how much time do I expect to accomplish my goals?
What am I going to do if I don’t reach my goals?
Keys to have a better main plan
– Set concrete and specific goals, responsibilities and deadlines
– It should include in which time frame you are going to monitor your achievements
– It should be practical
What system or systems you are going to use?
Describe the system(s) you are using, as well as all the components of it (set-up, entry signal, stop and exits, time frames to trade, etc.) It is important to have your system written down.
Under what market conditions you are going to trade your system?
Describe if you are using a trend-following system or counter-trend system or a consolidation system or a combination.
According to the system you have tested, what size of percentage returns (or pips) you are expecting for any given period of time?
You need to be realistic about how many pips you want to achieve. Take into consideration that there will be losing days or losing trades.
What currencies are you going to focus on?
Different currency pairs behave differently.
GBP/USD and USD/CAD are the most volatile currency pairs (amongst the majors).
EUR/USD and USD/CHF are at the midpoint (amongst the majors).
USD/JPY and AUS/USD are the less volatile currency pairs (amongst the majors).
Risk and Trade Management Plan
If you experience a consecutive string of losses, how will you react?
Describe the percentage of your “risk capital” you can tolerate losing before you will stop trading and what will you do about it? Are you going to stop trading permanently? Or just temporarily and then review your trading system?
What techniques of trade management you are going to use?
Describe the techniques you are going to use (trade multiple lots, trailing stops, etc.) and under what circumstances you are going to use them (i.e. if the market goes against my trade by half my stop level I will exit half of my position.)
What procedures you are going to use to review your performance?
Describe what you are going to do to measure your trading performance and how often you are going to do it. In addition, what is going to happen if you don’t achieve your performance?
How will you set your stop loss level and your take profit level?
Describe the techniques you are using to set the SL and TP levels.
RR ratio used on trades?
Describe under what circumstances you are going to use different RR ratios (i.e. if you are trading with the trend or against it then use a RR ratio of X:1).
Money Management Plan
What money management technique you are going to use?
Describe how much money you are willing to commit to each transaction.
What is the maximum exposure you are willing to take at any given moment?
For instance, if you already have placed a trade, how much are you willing to risk on your second or third trade? An overall risk of 3%, 5% or 2%? You can decide to risk 1% on all Euro trades, .75% on all Pound and Aussie trades and lastly .5% on every Swissy trades, so that at any given moment you don’t have more than 3% of your account at risk.
How do you plan to deduct money from your trading account? (i.e. salary, vacations, etc.)
Describe how often you are going to deduct money from your trading account and how will this affect the money management applied.
Risk level you are willing to tolerate?
Most of the time: the more returns you want to produce, the more risks you need to take in order to generate those returns. It is unrealistic to make 10% of return in a trade where you are only risking 0.5% of your account. It could be made, but not consistently. It would be realistic to achieve a 6% of return in a monthly basis risking 2% of your account.
You can add more questions in order to set your trading goals. Give this task the adequate attention; it will clear your path.