Importance of a trading plan in Forex

The 2-2-2 forex trading plan

Jan 24 • Forex Trading Articles • 469 Views • Comments Off on The 2-2-2 forex trading plan

As human beings, we crave order and need routines; we want to conform to norms and work in structured environments. Discipline and success are inextricably linked, and FX trading illustrates these requirements more than many other ventures.

Whether in work, sports, or stepping outside the convention to become an entrepreneur, you’re reducing your odds of success without applying rigid discipline.

A forex trading plan is the epicentre of the disciplined trader approach. It doesn’t have to be that detailed, but it must contain essential elements such as

  • What securities you trade.
  • What style of trading.
  • Your overall risk parameters.
  • Your method.
  • Your strategy.

These five critical elements help you fashion your overall trading plan. When you combine them, you have (by accident and design) covered all other bases.

The 2-2-2 trading plan could be an excellent base from which to pivot your trading.

  • You trade only two securities.
  • You only take two trades a day or have two live FX trades in the market.
  • You only risk two per cent max of your account size at any given time.

How a 2-2-2 trading plan enables control and self-control

Let’s break this down into a practical example. You might decide only to trade USD/JPY and GBP/USD. Although these pairs aren’t fully correlated (negatively or positively), they differ in their market reaction to calendar events and macroeconomic policy decisions.

Next, let’s look at your trading style. You could be a day trader who sticks to the plan and only takes two trades a day. If you’re a swing trader, you’ll only have two live swing trades on these pairs at any time.

Each trade you execute will only risk 1% of your account size. Therefore, you cannot exceed a risk of 2% during any day trading session or overall if you’re swing trading.

Finally, you’ll use the method and strategy you’ve created to engage with the forex market. You might use techniques such as breakouts, momentum, reversal trading etc. Or you might prefer to use near naked charts as you look for price action illustrated by candlestick formations.

Remove the fear, greed and competitiveness from your trading outlook

This 2-2-2 approach can be uncomfortable for many novice traders as their instincts fight against it. They might think they must take a trade if any opportunity becomes available. But without risk control and a solid trading plan, you’re flying blindfolded.

It would help if you recognised that no two days in the market are the same. Each moment is unique. Markets don’t repeat, but they can rhyme, so you work within the cycles and that potential rhythm. Rather than look at your day-to-day performance, take a longer-term view of market behaviour and your returns.

If you have a 2% losing day, your strategy is ineffective that day. You’re not wrong; the market has not been in tune with your system and the trading edge you’ve developed. Incurring a 2% loss is unwelcome, but it’s not a devastating loss, it’s not irrecoverable.

There may be days or trading sessions when you take no trades because the trading signals you rely on to transact market orders do not correspond with market movements. There could be sessions or days when you lose 1% or break-even, but if you resolutely stick to the 2-2-2 strategy, you can’t overtrade.

Rather than get impatient and try to force market orders because you’re frustrated by the lack of activity, you sit that session or days out. Always remember; being out of the market is taking a position.

The ideal base to begin trading and build from

Our 2-2-2 technique provides an excellent base from which to start your trading. You can quickly and effortlessly increase or decrease your risk, exposure and market engagement.

For example, if you’d prefer to begin using 1% risk and only trade one FX currency pair, then you could reduce to 1-1-1—one trade a day, one per cent risk, on one FX pair. The same rules and potential distribution between winning and losing transactions exist in theory.

Similarly, if you become confident in your strategy and its positive if you have developed confidence in the positive expectancy and have the profitable results to back it up, why not then 2-2-2 or increase the parameters to 3-3-3? We’re suggesting a controlled, relaxed, systematic approach to building a trading plan to trade the FX markets. The emphasis is on tight money management, patience and working with probabilities. It’s now up to you to experiment with the theory to see if it works for you.

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