There is an old expression in business that, if you fail to plan, you plan to fail.
What is a Trading Plan?
In business school, you are taught that to start a business you need a business plan. Trading is a business. Therefore, every time you trade you must be trading according to a well-thought-out and calculated plan.
A trading plan is a comprehensive framework that guides your decision-making in any trading activity you undertake. A trading plan is to and what a business plan is to a business. As the adage goes, ‘if you fail to plan, you plan to fail’. This is especially true in where risk is ever-present in the markets. A trading plan is not merely a trading strategy. A trading strategy will guide how you will enter and exit trades in the markets in a manner that enhances profitability and reduces risk exposure. A trading strategy can be based on technical analysis or fundamental analysis . A trading strategy is just one component of your overall trading plan, which goes beyond that to also capture your overall trading goals and motivation, your trading journal , as well as your trading psychology .
GOALS of a TRADING PLAN
Setting goals can help, but often novice traders set the wrong type of goals. As a novice trader your initial goals should help you eventually make money and more important than that is when you achieve goals , but making money should not be your main goal. Instead, opt to make your initial goals about the process and emulating traits of professional traders.
Initially, traders want to make goals about numbers: “I will make 1% per day on my $30,000 capital,” or “I will make 30% per year.” While it seems simple, to actually get to a certain percentage or to reach dollar targets, you will need to refine your market approach and hone your discipline. By plunging into the market and expecting to make a certain amount of money, the goal becomes almost impossible to reach over the long term. These types of goals require the trader to truly understand the capabilities (and limitations) of the trading plan they are employing, not just think they understand.
Based on the method being used, it may be impossible to reach a dollar or percentage goal, but it still could be valid and provide a good return. Therefore, the trader must either abandon the strategy or deviate from it in an attempt to find more yields. For many traders, this becomes an endless cycle of abandoning strategy after strategy.
STRUCTURE OF TRADING PLAN
There are seven easy steps to follow when creating a successful trading plan:
1-Outline your motivation and desire.
2-consider money management rules and determine how to minimize your risks and maximize profit .
3-Define your (short-term ,mid-term & long-term) goals.
4-Define your trading style ( scalper- day trader – swing trader – position trader- options)
5-Decide how much capital you have for trading.
6-choose your market(stocks-forex- crypto-..) and products and Assess your market knowledge.
7- improve your trading psychology and start a trading diary.
Strategies of Trading Plan
How do you develop a trading strategy plan?
Follow these steps to forming your first trading strategy:
Step 1: choose Your analysis approach whether is price action , harmonic patterns , Elliot waves or with indicators ….
Step 2: analyze your market situation and predict all possible scenarios
Step 3: Choose A Trading Time Frame. …
Step 4: Choose A Tool To Determine The Trend (Or Lack Of) …
Step 5: Define Your Entry Trigger. …
Step 6: Plan Your Exit Trigger.
STEP 7: Take a proper position size
STEP 8: DEFINE YOUR RISK and Choose a risk-reward ratio
STEP 9: BACKTEST and DEVELOP YOUR TRADING STRATEGY
the most trading strategies will fall under 4 main categories: breakouts, trend-following, counter-trend and market reversals.
So if you look at your strategy, you want to be able to see which category it falls under so that you can better understand, what are the strengths and weakness of each strategy.
SO Why is Having a Trading Plan Important?
The ultimate aim for any investor or trader is to achieve consistent profitability in the markets. A trading plan is a guide that ensures you will stay on track on your journey to your desired destination.
It does so by:
-Making Trading Simpler
It is easier to do something when you know what must and should be done. A trading plan lays out all the criteria that must be met before any trading decision is made. It will always point you in the right direction no matter the distractions present.
-Enhancing Objective Decision Making
Trading is about decisions. Good decisions will make you money, while bad decisions will cost you money. Having a trading plan ensures that you will make objective decisions at all times; and not subjective decisions that are driven by emotions which can eventually cost you a lot and put your trades and capital at risk.
-Building Trading Discipline
Trading is a marathon , not a sprint . It is important to build a solid trading plan and following it with religious discipline throughout your entire trading activity. This is the only path to long-term, consistent profitability in the markets. While traders will generally follow the daily financial news, , such as the , , or , and to pinpoint potential trading opportunities, sticking to your trading plan is of utmost importance.
-Highlighting Areas that Require Improvement
One of the side effect and core components of a trading plan is improving the trading journal, which is essentially a diary or record of your trading activity. Journalling your trading activity will help you to assess the performance of your trading strategies as well as other factors of your trading plan, such as risk management and trading psychology . This will, over time, highlight the areas where improvements can be made to help you become a better trader.
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate