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Developing a Foreign Exchange Rates Trading Plan

This article looks at the different foreign exchange rates trading styles, and how the market conditions affect the development of a trading plan.

Foreign Exchange Rates Trading Plan

Experienced traders will agree that the development of an effective trading plan is the key to trading success.  This trading plan acts as a guideline to all your trading behaviours, which is very useful if you should ever find yourself in a difficult position when trading.  Yet, before you can develop this essential plan you must note the difference between the different types of traders.  This is vital as the type of trading plan developed depends greatly on your trading style.  These styles are the discretionary trader and the systems trader.

The discretionary trading style

The discretionary trader is one who bases his traders on a combination of technical analysis and intuition.  This trader will use a specific trading plan, but he still uses a ‘gut instinct’ to determine whether or not to place the trade.  For example, the discretionary trader’s chart may indicate that a presenting trade is the best long trade option; yet, he will choose to skip that opportunity if the market is too active for the trading session.

The systems trading style

The systems trading style will follow a trading systems methodology completely.  This trader is highly technical and bases all trades on absolute calculations making it similar to automated forex trading.  Unlike the discretionary trader, the systems trader utilise a detailed trading plan removing all guesswork and ‘gut feeling’ elements providing effective consistency.

Developing the foreign exchange rates trading plan

As is aforementioned, a foreign exchange rates trading plan is a set of rules acting as a guideline for the trader.  It details the style and type to act as a reference should he ever diverge and face a trading pitfall.  Below are some components that can be seen on foreign exchange rates trading plans:

1. The different markets being traded

In previous years, the trading market was reserved not only for large players but to stocks and commodities as well.  Nowadays, currencies are being traded among retail traders and large corporations.  In order for trading to be successful the chosen currency pairs must be traded in the correct trading sessions.  The forex market is highly volatile and shows great liquidity, and if trading on this market you must understand what this means.  When developing a trading plan you must be aware of the importance of both liquidity and volatility and how it will affect your trading.

Volatility refers to the amount and speed at which a currency price waivers in a particular market.  When the market is volatile there are more trading opportunities from which players may profit.  However, if there is a market movement – if a price rises in an uptrend or falls in a downtrend – the opportunity to profit increases.  If the market remains the same, then the chance of making money is reduced.

Liquidity refers to the executing of orders in a quick and efficient manner without causing alterations in market movement.  A market with good liquidity will present with tight bid/ask spreads, whereas a less effective market shows wider spreads.  Furthermore tight spreads means orders will be filled more quickly.

 

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