Every successful trader always has a trading plan. A trading plan helps you to be in check. Imagine a sailor in the deep sea sailing without a compass. He is surely headed for disaster because he would be venturing on a blind journey. He will end up lost in the sea. Surely you don’t want to be venturing on a way to disaster. Similarly, a trading plan serves as a guide to a trader.
A trading plan is a serious resolution tool you make to guide your trading activities. Even with the best forex brokers guiding you, without a personal trading plan, you are bound to lose your funds. It is a personal decision and not another person’s plan. Everybody is unique in his own way and what works for someone else might not necessarily work for you. When you use another person’s plan, his risk tolerance might not align with your realities and it can end up damaging your portfolio.
As a trader, you might have many things you wish to achieve in the market. You have goals and strategies you might look forward to executing. You might also have a motivation that prompted you to start trading. That is one of the reasons why you need a personal working trading plan.
Note, however, that a trading plan differs from a trading strategy. A trading strategy is an action plan that detects when to make a market entry and exit. For example, you might decide to buy Ethereum when the price falls to $800 and sell when it climbs to $1600. A trading strategy will ensure you achieve stick to the plan.
Importance Of A Trading Plan
Having a trading plan helps you make a reasonable trading decision. A trading plan will also help you avoid being sentimental and emotional about a particular asset. The following are the importance of a trading plan,
- Easier Trading: When your trade is planned ahead of time, it makes it easier to set your priorities and execute them in the market rather than running around in circles and being indecisive in trade.
- Making Factual Decisions: When you strategize on taking a profit at a particular price, your trading plan will help you to stick to it and avoid being greedy. Discipline will save you a lot of heartbreak if you adhere strictly to your plan.
- Better Improvement in Your Trade: With no perfect human trader, mistakes are bound to happen once in a while. Having will help you review these mistakes and improve on areas you are lacking.
We will review 7 steps in which you can build a solid trading plan that will stand the test of a storm.
Setting a goal should be made diligently and carefully. When you set a goal, it must be reasonable, measurable, attainable, straight to the point and timely. For example, setting a goal of increasing the value of your portfolio by 1000% in the space of three months is unrealistic and not smart. Such a margin might seem unattainable because of the time frame. This kind of goal might have been fueled by greed which is dangerous.
But having a goal of increasing the value of your portfolio by 20% in the space of one year looks smart, reasonable and attainable.
Additionally, you should decide your niche of trade. There are basically four types of trading styles namely Swing traders, Scalpers, Day traders and Position traders.
For you to last as a trader and be a successful trader, the level of your risk tolerance is important. When you have no risk level as well as a risk management plan, you might be on a downward movement.
For some traders, they set their risk tolerance to like 5%. What this means is that once the loss is up to 5%, they can exit the market. This saves them from further loss.
- Decide How Much Capital To Invest
All fingers are not the same. In the same vein, all pockets are not the same. You must personally choose an amount you wish to invest and you must stick to it. Looking at the amount others are investing is not ideal. They might actually have more money to risk than you.
Trading is a very risky business and one could end up losing all his capital due to the volatility of the market. Ensure you calculate yourself well so as to ensure you can afford the potential loss in each trade.
Before the normal trading market opens, do well to check the trends around the world. This could give you an insight into how the market might turn out that day. Wait for trading signals to be released before jumping into the market.
Avoid taking unnecessary risks. Remember professional traders base their trade on probabilities. Never gamble with the market.
For a trading plan to be efficient, it needs to be supported by a trading record. Having a trading record will help document your trades and will also help you note potential trades.
Note down the mistakes you made and have an action plan on how to correct them and never repeat them. It helps you stay rational and avoid trading with emotions. The more details you have the better you become. Always consult the saved records so that you can better analyze the profits or losses for a particular trade.
- Set Your Entry And Exit Rules
Setting your entry rule would ensure you know when to buy signals. Before entering a trade, you must know at what point to make an exit. Set your stop loss. Your stop loss must be clearly defined and followed. But if at any point the market falls below it, take a leave.
In actuality, exits are more significant than entries. Many professionals have subscribed to Robo-traders because they are well-programmed and factual.
- Evaluate Your Performance
There is every need to evaluate your daily performance in the market. This will help you to stay on track and make adjustments where needed. Remember that it might not be all rosy. Even experts lose a lot of money. Shake off the loss and look at the long-term benefits.
While building a winning trading plan is important, make sure you maintain it and make adjustments where necessary. Doing this will refine you as a trader and make you reap more profits.