Intermediate

Mastering forex

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Creating a forex trading plan

4-minute read

A trading plan is especially important for FX traders – it helps guide you when the markets are turbulent, and provides a blueprint for success. To finish this course, here a few tips to help you make a currency trading plan that works.

1. Pay attention to trading times

Although forex trading is a 24/5 business, there are standard peak times of increased activity.

When the London and European markets open, for example, volume intensifies as institutional traders move the forex markets. Then, once the New York session opens, forex trading volume increases again.

There is a lull between New York markets closing and the Sydney session opening. When trading volume reduces, spreads might widen, markets might be stagnant, and the fills you get might not be as precise. You could be in danger of trading noise when the forex markets have little direction.

If your plan isn't working as it should be, it might be because you're trading at the wrong time.

2. Use stops and limits

The fast-moving nature of forex means that stops and limits are hugely recommended for every single trade.

As we covered in the Techniques of successful traders course, it's often a good idea to outline your maximum risk on any opportunity as part of your plan. Then, ensure you use a stop to limit your risk there – as well as a limit at your profit target.

You might also want to think about setting a personal circuit breaker – for example, to stop you from trading if you reach a daily loss of 5%.

3. Identifying currency pairs to trade

Within your trading plan, you might want to earmark the currency pairs you wish to trade. The major currency pairs tend to have the tightest and most consistent spreads, partly due to trading volume.

Developing trading methods and strategies built around the majors allows you to concentrate your attention on a few pairs rather than looking to match your technique on a wide range of currency pairs. You can also adjust your economic calendar to isolate medium- and high-impact news relevant to the major currency pairs exclusively.

Currency correlations

As they are traded in pairs, many FX markets are closely correlated – meaning that if one moves, there's a strong likelihood that the other will as well.

One of the most referenced forex correlations, for example, exists between EUR/USD and USD/CHF. This is actually a negative correlation: when one pair rises, the other tends to fall and vice-versa.

Knowing about correlations is useful for managing your risk and capital. After all, if you have several similar positions on closely correlated pairs, then one major move could affect all your trades in the same way.

4. Plan for rollover rates

When trading currencies, you borrow one currency to purchase another. The rollover rate is the interest charged or earned for holding positions overnight. A rollover interest fee is calculated based on the difference between the traded currencies' two interest rates.

For EUR/USD, if the swap rates were 0.817/1.28, on a long position of €10,000, you would be charged $1.28 to hold the position overnight. If you sell EUR/USD for €10,000, you will receive $0.82 overnight. These amounts are then converted back into your base currency.

5. Readjust your forex trading plan

During your early months of live forex trading, you'll encounter various market conditions and events. Your plan might work well for some of them, but not others.

This is why adjusting your plan as you go along is such a good idea – you can learn from your mistakes, build on your successes and ensure that you're always adapting. Many successful traders keep a trading diary to track wins, losses, emotions and the market conditions each day.

6. Know the regulations where you trade

Regulatory bodies determine the leverage and margin you can use to trade the forex markets. These rules impact what currency pairs you can buy and sell and the size of account you can manage.

Most credible forex brokers ensure they have regulations in all the areas they operate and where their clients are based. FOREX.com, for example, works with regulators in every country we cover.

Here are examples of two regulatory bodies and the limits they impose:

ESMA

ESMA (European Securities and Markets Authority) oversees the operation of all trading firms in Europe. All forex brokers must limit forex trading leverage to 1:30 maximum on major currency pairs with 1:20 on minors and exotics.

A margin close-out rule exists on every account, standardising the percentage of margin (at 50% of the minimum required margin) at which brokers must close out one or more retail client's open CFDs.

CySEC

The Cyprus Securities and Exchange Commission authorises Cyprus forex brokers. CySEC demands regulated brokerages keep clients' funds segregated at respected banks and separate from the broker's assets to guarantee additional protection.

CySEC limits leverage on currency pairs following ESMA's directive. From mid-2019, the regulatory body reduced trading leverage to a maximum of 30:1 on currency pairs.