How to Construct a Winning Trading Plan

Trading is a business, so you have to treat it like it is your path to success. Now, one of the main reasons that many traders win or lose their entire accounts quickly is because they start trading with real money before they learn how to trade. Many of them think that trading is a lot like gambling and they are hoping to get lucky.

In trading, any trader who makes money on a consistent basis will tell you the importance of a trading plan. Although it does not guarantee success, your mind stays focused plus you can avoid making the same mistakes other traders commit.

The principle of having a concrete yet attainable business plan does not only apply in currency trading but in all businesses too. A business is bound to lose if there is no business plan at bay. "Fail to plan and you plan to fail" is the old saying in business. So let me help you construct a trading plan that can help you succeed in this business. Here are some items that MUST be in your trading plan.

Do your homework: Understand how a forex trading account works. The best way to understand this is to call your broker, open a demo account have them explain to you how this works. Open a trade with one lot in your account and observe what happens in a demo account.

What must be my goal setting before I go live? Before going live, set your average number of PIPS, what is your win to loss ratio, the risk to reward ratio and other realistic profit targets. Before you risk any real money, you should establish a goal for yourself for demo trading, proving to yourself that you do know how to trade before risking real money.

How often will I enter a trade? You would want to know this in advance and a good way to figure this out is to look at a chart and on whatever time frame you intend to trade, go back and look at where the entries and exits occurred in the past and see how much time passed in between the entry and the exit.

What will be my starting capital? Will it be $300? Will it be $5000? Will it be $100,000? It is common knowledge that most businesses fail because of undercapitalization, which is true in the forex trading business. It is okay to start with a small amount of capital while you master trading the right way.

How much will I risk per trade? A good way to find this out is to go to the time frame where you would plan to be trading. It is important to understand that your risk is based on the number of PIPS that you are willing to go negative or the number of PIPS in your stop loss, not the amount of your deposit. Decide what percentage of capital you will have at risk in a trade throughout your trading business. Two percent capital at risk is a recommended industry standard for maximum risk in a trade. But that number is based on your win to loss ratio with your risk to reward ratio.

A lot of effort is required on your part to successfully launch any business. Training and education should also be an ongoing aspect of your trading business if you intend to be successful. Again, a trading plan does not guarantee success especially if you are using flawed techniques. But with a well built trading plan, you might be on your way to consistent increase in capital.