Most people start trading with little or no planning. Before entering in a trade, they base their judgment on unsubstantiated evidence - They think they see a trend just because of a few indicators "looks like it". Some are even worse, they don't have any reason at all when they enter a trade. This kinda of "strategy" usually leads to losing in the trade, and we all know that losing in a trade is bad. Winning might seem as though the strategies worked, but in fact, it is just that the person is very lucky and hit the jackpot.
This is no different from gambling, and would end in the same way too. After some time, the trades would end badly and the trader with no planning would seek to even out losses in order to break even. Planning is a must when you're trading currency. With no plans or strategies, you're bound to lose out in the long run.
As you might know, emotions are the biggest barrier to thinking rationally. You will definitely be swayed to take a larger position or to plan for a greater profit margin if you see that the currency market is doing well on the day you trade. Plan your entry, stop, and profit targets well before trading to avoid being swayed by emotions. Not only does this allow you to think logically, it also forces you to do some planning and come up with a trading strategy. Stick to the strategy when you're trading in Forex. Automated software helps you as you avoid having to stay in front of the computer every second.
In addition to the entry, stop, and profit targets, you should also include in your strategy a plan for deciding acceptable risk:reward ratios before entering into Forex trades. The higher the ratio, the more tempting the trade would be, as you risk little but have a large profit target. Determining the ratio is easy once you have decided reasonable entry, stop, and profit targets. Just divide the difference between the entry and profit target by the difference between the entry and stop. If the ratio looks "good", for example, it lies around 1:1.5, then it would be tempting to commence currency trading. Note, however, that you decide the ratio after planning the entry, stop, and profit target and not the other way round to avoid exaggerating your acceptable targets just to have a good ratio.
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Your Forex strategy should also include planning for an acceptable position size. Most traders treat each trade equally - their position size is the same percentage of their equity for all trades (around 1% - 3%). An easy way to determining the position size is to first decide how much to risk on the trade (X). This is done by multiplying the percentage risk per trade (~1% - 3%) by your total equity. Next, multiply the currency's pip value by the difference in pips between the entry and stop (Y). Finally, to get the number of lots you should trade, divide X by Y. Doing so beforehand is an important part in all currency trading strategies.
Once again, it is very important to be disciplined and plan the entry, stop, and profit target before you enter into any Forex trades. Once you have done that, you can easily determine the risk:reward ratio and a suitable position size. Planning for these is an important part of any currency trading strategy. By planning this out before trading in Forex, you can trade on any time frame as your strategy would work out the same way. Having such strategies when trading currencies would lead to more consistent results than basing our judgment on on-the-spot decisions.
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