A trading plan is an essential part of a successful trader’s toolkit. Regardless of your trading routine and how often you trade, you should think of it like a business – you’re investing time and money, after all. And just like any business venture, a thorough plan is integral to success.
Your trading plan will be like a business plan, giving a framework for the decisions you make. Having your plan in place doesn’t guarantee success – far from it. But what it will do is help you to trade logically, and to understand how to handle both positive and negative outcomes. This will help you to develop as a trader.
Trading is certainly difficult. No one can be able to predict how the markets would behave on any particular day. Trading is viewed by successful traders as a lifelong journey with ongoing lessons to be learned. This always implies making errors as well.
Trading is unquestionably mentally taxing. Your trading strategy will be helpful in every circumstance, but it will be especially helpful when your trading career hits a rough patch. Your plan becomes crucial to the activities you take when nothing seems to be going your way. Consider your plan as your agreement with yourself: it will keep you on course, help you focus, prevent hindsight bias, and keep you reaching for your long-term objectives.
We have included some of the crucial information and thinking processes that should go into the creation of your trading plan in order to assist you. There are a variety of viewpoints regarding what is and isn't necessary in trading, as there always are. Understand that it is your trading strategy. Although you should give each of the ensuing considerations great thought, your approach will likely differ from everyone else's by the end of the process.
To make a trading plan, follow these steps:
- Simply stating that you desire to make money is insufficient. Your motivations for trading need to be well-considered. Think long and hard about why you want to be wealthy. Would you like to purchase a new car, for example? Do you wish to invest in your family financially? Maybe you'd like to retire?
- Make a note of it in your trading plan, whatever that may be. Don't worry if your needs or motivations change; you can always revise your plan later if necessary. In order to have a personal purpose for creating your trading plan, it is crucial to honestly examine your character and your answers.
- This is how you can go about breaking your goals down:
- Set a life-changing, crazy, ambitious, and passionate aim. This is where you get to think large and should be guided by your trading motivations, which can be anything. Following this, you can begin to be realistic and divide your goal into manageable steps.
- Decide on a six-month target. Consider where you need to be in order to accomplish your main objective. It's okay if you have to spread this out across many years. Ensure that your plan will benefit you.
- Set a monthly objective. Knowing your six-month goal will help you to better understand how it will translate into monthly goals.
- Finally, set your weekly and daily goals. Align these with your other goals and consider how you will adopt good daily habits to help you achieve your aims.
- You need to have a risk management plan for every trade, and it’s essential you follow the rules you set for yourself.
- The rule of thumb is never to risk more than 2-3% of your capital per trade. This makes sense both financially and psychologically. Financially, you are much more likely to recover smaller losses. If you lost 25% on a trade, you’d have to make a 33% gain on your next trade to get back to even. Psychologically, smaller losses are easier to deal with too. Imagine how it would feel to lose 25% of your capital on two trades in a row.
- Set a daily loss limit. When you reach this limit, simply walk away. 10% is often the recommended maximum limit, but you should set an amount that is right for you. The important part is to stick to it.
- Define profit limits too. Greed can be destructive, and you need to get out of trades at the right time. Lock in your profits on a per trade and a daily basis.
- Define profit and loss parameters on your account as a whole. At what point do you step away and reassess your trading? At what point do you pull money out of your trading account? Make sure this is all pre-planned.
- Consistency in attitude, discipline, and behavior are key components of successful trading. You need to include it into your daily schedule because, if you're not a professional trader, it's likely that you have a lot of other obligations.With this, you may be as specific as you like. You can decide to trade between 6 and 8 in the morning. Be more specific once you've made your decision.It's not necessary to trade every day. Don't trade if you're feeling ill or preoccupied. Tomorrow the markets will be open. When trading, it's crucial to have a reliable and consistent strategy.
These are the key rules to follow when building a trading plan:
- Have a printed version of your plan and keep it close at hand. A successful mental trading plan does not exist.
- Make your plan uniquely you. Trading is a personal undertaking, so you should include the components that, given your objectives, will work for you.
- Be sure to update your trading plan frequently. It's crucial to have it established from the start, but it will change as your trading career develops.
- Maintain simplicity. Although it won't cover every possible circumstance, your trading plan should still be useful in most everyday trading scenarios.
- Keep your trading activity and your plan separate. It may seem paradoxical, but it's critical that you create your strategy based on your goals, not your current emotions, and that you do so objectively.