My Process for Finding and Planning a Forex Trade

Welcome to my trading room. I’m kicking off this trading diary to document my process, and I’m excited to get started. Every day in the market offers its own unique lessons, and my goal here is to explain the thinking behind my decisions to enter or exit a trade.

The setups I’ll be discussing aren’t overly complicated. It really boils down to two main types of entries: swing and momentum. Having both in your toolkit allows you to adapt whether the market is moving sideways or in a clear trend. If you can learn to read the Wave indicator and draw basic trend lines, support, and resistance, you’re already on your way to spotting opportunities. Add in price levels from Fibonacci retracements, psychological numbers, and pivot points, and you have everything you need to set your stops and identify profit targets. For anyone considering , mastering these basics is a great first step.

Today is a notable one. After 18 years, Alan Greenspan has retired as Federal Reserve chairman. Whether you were a fan or not, you have to respect his influence over the past two decades. I hear a lot of people second-guessing his decisions now, but today marks the end of an era and the beginning of the Bernanke era. We’re watching history happen. Although Benjamin Bernanke’s first testimony is still two weeks away, the market will be filled with speculation until then.

On a personal note, I’m still getting over the flu, which means I’m oversleeping and not quite at 100%. That’s just life. But I’m feeling well enough to do my homework and engage in some light trading. Light trading can be approached in two ways: if you have a couple of hours, you can scan the longer-term charts for setups. If you have an hour or less, it’s better to focus only on those longer-term time frames. If nothing is there, you just wait for tomorrow. With that in mind, I’m focusing on the longer charts this morning, specifically the 240-minute and the daily charts.

Scanning the Markets

I’m starting with a clean slate today—no existing trades to manage. I’m doing a fresh scan of what’s on my radar, which includes a few key currency pairs. I’ll look at the euro (EUR/USD), the Australian dollar (AUD/USD), and the British pound (GBP/USD), which all tend to move opposite the U.S. dollar. Then I’ll check the Swiss franc (USD/CHF), the Canadian dollar (USD/CAD), and the Japanese yen (USD/JPY). These six pairs account for over 90% of all daily trading activity.

Never forget that when you trade forex, you’re really trading the U.S. dollar. The single most important question on traders’ minds around the globe is: where is the dollar heading? A long position on EUR/USD and a short position on USD/CHF are essentially two trades expressing the same opinion—a bet against the dollar. If I take both, I have to remember I’m effectively doubling down on the same idea. This perspective is vital for managing any in the financial markets.

Identifying a Potential Setup

My scan brings me to the daily chart of the Swiss franc (USD/CHF). The Wave indicator has almost completely flattened out, which immediately makes me think of a potential momentum trade. I don’t want to assume which way it will break, but the MACD histogram is above the zero line. This tells me that if the price breaks through the horizontal resistance level, I’ll have a confirmed trade. I’m not completely sold on this setup, though, because the Wave isn’t at the perfect flat angle I prefer. Still, it’s within an acceptable range, so I’ll be keeping an eye on it.

Whenever I see a potential setup on the Swissy, I immediately check the euro. The EUR/USD daily chart shows the Wave in what I call a “transition.” It’s shifting from a clear uptrend to a flatter, sideways angle. A recent candle pierced the uptrend line, and the MACD histogram has a negative reading. This confirms a short trade, though it feels a bit aggressive since the sideways pattern isn’t well-established yet.

Walking Through a Trade Plan

For the sake of this diary, let’s use this EUR/USD setup to walk through how I’d build a trading plan. Let's rewind to yesterday, January 30th. The EUR/USD broke its uptrend line at 1.2075. The MACD was already negative, so the confirmation was there.

Determining the Stop-Loss

Before entering, the first question is always: at what point is this trade idea no longer valid? For this short trade, a break above the major psychological level of 1.2200 would invalidate it, as prices holding above that level would likely attract buyers. Another invalidation point would be a break above the downtrend line that forms a triangle pattern.

So, do I have to place my stop-loss there? Not necessarily, but it’s a starting point. Other options include the high of the breakdown candle or the previous day’s high. After weighing the options, I’m settling on the 1.2200 level. This represents a potentially significant loss if it gets hit, but it gives the trade enough room to fluctuate on a daily chart. These are the tough judgment calls that separate successful traders from unsuccessful ones, and it's a key part of responsibly.

A quick note on experience: you hear “experience is the best teacher” for a reason. I’m not talking about hours on a demo platform. That’s just practicing how to use the software. There’s no fear or greed involved. Once you’re comfortable finding setups, take a small amount of risk capital—maybe $1,000—and open a micro account. That’s where the real learning begins. True require skin in the game.

Setting Profit Targets

Identifying profit targets is often easier because there will be more than one. As the price moves lower, I just need to locate the support levels. The most obvious ones are the major psychological levels ending in “00.” I’ll be watching the 1.2000 level for support. A good rule of thumb is to set your exit order 3-5 pips before the level, so a limit order might go in at 1.1905. Beyond that, Fibonacci extension levels at 1.272 and 1.618 also serve as excellent profit targets.

This entire process—finding the entry, stop-loss, and profit target—is something that must be done before every single trade. It’s a foundational discipline for and pros alike. With practice, you can do it within a few minutes of spotting a setup. You should also be proactive, setting up multiple scenarios for both long and short trades before they even trigger. By planning ahead, you’re ready for whatever the market brings.