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.
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.
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.
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.
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?
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
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.
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.
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.