Simply put, a trading plan is an all-inclusive setup that makes it easy for you to make concrete decisions regarding your trading activities.
Such a plan is crucial in deciding when, what, and how much you will trade. In fact, even the thriving traders on Wall Street rely on this concept for effective trading.
The key principle in creating successful trading plan is to personalize its content. While you can refer to another trader’s plan, it is important to remember that their capital and willingness to risk is different from yours.
It is important to note that a trading plan is different from a trading strategy. The latter concept focuses on how and when you need to enter or exit a trade.
Benefits of a Trading Plan
Making logical decisions
Successful traders are those that have mastered the art of making decisions based on logic rather than emotions.
While following your instincts can sometimes bring good results, doing this in the long term relying on emotions can ruin your account.
With an apt trading plan, you will be aware of the point at which you need to stop losses or take profit.
Discipline is one of the principles of successful trading. Sticking to your trading plan will deter you from taking up more risk than you can handle.
Studies show that traders and investors who have a trading plan are more disciplined compared to those who lack it. For example, these traders open trades only when certain market conditions are met.
Ease of trading
You will have planned everything before the actual trading. As such, it will be easy to trade of the pre-determined considerations.
If you have a good plan, you will be at a good position to know when to enter or exit a trade. You will also know when to stay away from the market. In other words, when you have a good plan, your trading approach will be much easier.
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Ability to improve
A trading plan encompasses a record of your past trading activities. With the embedded information, you will be in a position to learn from previous mistakes and improve on your trading. When you have a good plan, it becomes substantially easier for you to improve and become a better trader.
Avoid huge losses
Another benefit of having a good trading plan is that it will help you avoid making substantial losses. There are several reasons for this. First, a good trading plan will ensure that you only enter trades that meet your criteria.
Second, a plan ensures that you have all risk management strategies when you open a trade. Examples of these strategies are position sizing, having a stop-loss and a take-profit, and looking at correlations.
It makes trading fun
Further, having a good plan will make your trading fun. Ideally, when you have a plan, you know what to look for in a chart and the catalysts. Most importantly, you know when to be active in the market and when to be aggressive.
How to Create an Apt Trading Plan
Define Your Driving Force
Why do you want to trade? What do you intend to gain from trading? These questions form the basis of a fruitful trading journey.
The answers you write down will give you the drive needed to execute trading activities consistently.
Specify the amount of time you wish to put into trading
Do you intend to be a full-time trader or do you have other commitments that require your attention on a daily basis?
Based on your occupation, will you be able to trade while at work or will you have to trade late at night or early in the morning?
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These questions will guide you in creating a schedule that works for you as a trader while still leaving time to deal with your other commitments.
Additionally, the nature of your trading activities will determine the amount of time you should commit to the profession.
For instance, opening several trades in a day will require a substantial amount of time. It is also crucial to note that the time you set aside shouldn’t be used on the actual trading alone.
You need to prepare for trading by reading relevant content, analyzing the markets, and practicing your strategies.
Stipulate your goals
Use the SMART model to define your goals. It is also important to identify your preferred trading style based on the amount of time you intend to input into the profession as well as your attitude towards risk.
The key trading styles are:
- swing trading
- day trading
- position trading
Another important aspect that is often overlooked is on psychology and mental preparedness. In this, you should always assess whether your mental state is fine to trade.
For example, you will be able to handle a big loss or not. While strategy plays an important role in the market, the reality is that psychology plays a bigger role.
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Select a Risk-Reward Ratio
Before you trade, determine the level of risk you are willing to take on. This evaluation should be on your individual trades as well as the entire trading strategy.
It is possible to lose more times than your wins and still record substantial returns. To calculate your risk-reward ratio, weigh the amount of funds you intend to risk against your potential gains.
Decide on the Amount of Funds You Intend to Input into Trading
One of the principles of successful trading is that you shouldn’t risk more funds than you can manage to lose.
For better risk management, start with a demo account and acquire the skills and experience needed to trade on a live account.
Gain Ample Knowledge About the Market
The market you intend to trade is bound to affect your trading plan. For instance, a stock trading plan is different from one on currencies.
To begin with, get adequate information on the asset markets and classes you intend to trade. Evaluate the market’s volatility, potential gains or losses, and other relevant factors.
If you are unsatisfied with the prevailing conditions, consider a different market.
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Have a trading diary
It is important to document the details of your trades to identify the aspects that are effective and those that you need to drop.
In addition to the technical details, include the logic that drove your trading decisions. A detailed trading diary will aid in improving your skills.
Stay up to date
Another way to build a good trading plan is to ensure that you are up to date on the market. Some of the top ways of doing this is to ensure that you have an economic calendar and you have the best sources of news.
Some of the top news sites to use are Bloomberg, Financial Times, and WSJ. Social platforms like Twitter and StockTwits are also vital sources of news.
Review your trading routine
Another part of your strategy is to review your trading routine. Having a routine is a good approach since it helps to simplify your trading process.
An example of a routine is to start by looking the calendar, top movers, and then doing individual analysis.
The key to successful trader is ample preparation. A Trading plan is one of the essential tools of preparing for a trade.
By following the steps included in this article, you will be in a position to improve your skills and identify the concepts that work for you as a trader.
External Useful Resources
- How to create a successful trading plan - IG
- The Difference Between A Trading Strategy And A Trading Plan - Rockwelltrading