Jumping into forex trading without a solid plan is like going into deep waters without a life preserver if you do not know how to swim. There are multiple variables to consider when creating a forex trading plan.
Consider taking a forex trading course to learn the market basics and master various trading techniques. Such training can also help you discover avenues for coping with changes to your trading plan because of the market’s volatility.
How Much Do You Know About the Forex Market?
What’s your current knowledge base about the forex market? Are you familiar with the different currency pairs in which you can trade foreign currency? While it’s commendable to be familiar with the most popular traded currency pairs (EUR/USD, USD/JPY, and GBP/USD), learn about the lesser-known pairings, too.
You may never know if lesser-known currency pairs will skyrocket in value for whatever reason. Research conversion rates for as many currency pairs as you can. Evaluate the market daily to see how they are performing. Their change in value will help you to create and refine your trading plan as needed.
It is very important to never trade when you do not know much about the Forex market. This is true even when talking about very popular currency pairs like EUR/USD. Several articles might be written about that but if you do not understand it, there is absolutely no reason to trade it. The truth is that Forex trading is all about patterns, information, and what you notice. Without these, it is close to impossible to be successful.
Your Risk-Reward Ratio
A key variable for creating a trading plan is considering your risk-reward ratio. Investing in a riskier currency pair can enhance reward even through market volatility.
The high volatility of the forex market means that any currency exchange can be a risky engagement as values bob and weave daily.
Once you make your investment, pay close attention to how the values of the currency pair alter a few times per day. Keep an eye on the value changes throughout the week as well so you have less loss at hand if your original investment value plummets.
You can discover your risk-reward ratio by looking at your investment versus the possible profitable outcome. If you have a $50 forex investment with the chance of it going up to $100, this means your risk-reward ratio is 1:2.
New forex traders may start with a lower risk-reward ratio to stay comfortable. However, the rule of thumb is usually to score above a 1:3 risk-reward ratio for optimal return on investment (ROI).
To make it even simpler for you to understand risk-reward ratio, you can always think about how much it would impact you to lose the money you want to invest with. As an example, if you only have $50 to make an investment, you cannot really use all of it on a single trade. Always think about what would happen if you would lose the money you put in. If this is a problem, the risk is most likely too much for you.
The Amount of Capital For Investing
Now that you know your risk-reward ratio and we hinted at how much you can invest with, let’s apply this to your investing budget. Based on your trading plan, avoid investing beyond your set budget.
Choose a few forex investments that look promising and split up your budget accordingly. Start with a small investment and see how it performs. If it stays stable or increases a little, you can invest more into the forex trade if your budget allows.
How much you can invest in every single investment is all up to your risk tolerance. But, generally speaking, you should opt for a small percentage of your full investment budget.
Diversifying is simply a necessity to protect your assets. If one trade goes badly but you have 10, it will not impact you that much. If you only have 2 and your entire investment budget is put into them, losing a trade is something that will negatively impact you a lot more than you might be able to handle.
Knowledge is power, as the saying goes. Learn a little something each day about the changing value of currency pairs and read news stories to stay current with what is happening in the forex market.
Reevaluate your risk-reward ratio as the currency pair values alternate each week. Always keep in mind the capital you have on hand, so you lose less of your investments in case the markets turn against you.
And last but not least, make sure that you never make a move in the Forex market without adequate information. The more knowledge you have about what you do, the higher the possibility you will end up making money after your trades are over.