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Trading Plan: What it is, Why you need it, How to get it


June 11, 2020
Trading Plan: What it is, Why you need it, How to get it

There’s an old saying you probably heard of before, that says “If you fail to plan, you are planning to fail”. This quote is also “spot-on” when it comes to trading, and the most successful traders say it themselves.

Van K. Tharp, one of the best trading psychologists, once stated:

“A peak performance trader is totally committed to being the best and doing whatever it takes to be the best. He feels totally responsible for whatever happens and thus can learn from mistakes. These people typically have a working business plan for trading because they treat trading as a business.”

What Tharp meant by this, is that the traders who perform the best, have a well-established plan to do so. But before we jump onto the whole “why” you need a trading plan-extravaganza, let’s see exactly what this entails, in order to take your trading skills a step further.

So, What is a Trading Plan?

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First of all, a trading plan is a comprehensive decision-making tool for your trading activity. It should help you decide what, when, and how much you should trade.

With a smart plan, you’ll have guidance on which market to trade, when to take profits, when to cut your losses, and where other opportunities could exist.

Although a trading plan should be made by you for you, there is always the option of using someone else’s plan as an outline. However, you should always keep in mind that someone else’s attitude towards risk and available capital could be vastly different from yours.

Many new traders might confuse a trading plan with a trading strategy, which defines precisely how you should enter and exit trades. A simple trading strategy would be ‘buy bitcoin when it reaches $5000 and sell when it reaches $6000′. But a trading plan goes deeper than simply “buy” and “sell”.

Why You Need a Trading Plan

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The reason a trading plan should be essential when trading, is because it will be your roadmap for how to trade.

From entry, and exit rules, as well as risk management and position sizing rules, it can help you make logical trading decisions and define the parameters of your ideal trade.

A good trading plan will also help you to avoid making emotional decisions in the heat of the moment, which is the “trap” many new traders fall into.

Other benefits of having a good trading plan include:

  • Easier trading: Since you will plan ahead, you can trade according to your pre-set parameters.
  • Objective decisions: Thanks to your trading plan, you should now know when you should take profit and cut losses. This will help you avoid any emotional-making decisions when trading.
  • Trading discipline: If you stick to the plan, you will know better what works and what doesn’t, evolving as a trader through experience.
  • You improve: By keeping a record of your trading plans, you track your progress as you grow your trading skills. You can monitor better your trading progress, and learn from your mistakes.

How to Create your Trading Plan

We know it all sounds good in theory. But how can a trader actually create their trading plan? Well, we got you covered.

There are actually 7 steps in which you can create your trading plan. Although your plan can include anything you personally find useful, it is suggested that it covers things such as:

  1. Your motivational reasons for trading

Writing down (and we mean literally) your motivational reasons for embarking on this trading journey is very important.

As we previously mentioned in the article titled “How to Start Trading in 7 Simple Steps”, it’s important to set your goals from the very beginning, discover not only what you want to trade, but why you want to trade it.

  1. The time you are willing to invest and commit to

Are you thinking about trading full time? Maybe looking to grow your current retirement account? Or do you just want an extra income?

No matter what the reason is, you need to think about how much time and money you are willing to invest in trading. For instance, if you want to make a lot of trades in one day, you will be needing more time.

It’s also important to spend enough time preparing yourself for trading, which includes education, practising your strategies, and analyzing the markets.

  1. Your trading goals

Any goal you have must be SMART: Specific, Measurable, Attainable, Relevant, and Time-bound.

It helps to also decide what kind of trader you want to be, in order to specify your goals. The four main trading types are:

  • Position trading: holding positions for weeks, months, or even years with the expectation they will become profitable in the long term.
  • Swing trading: holding positions over several days or weeks, to take advantage of medium-term market moves
  • Day trading: opening and closing a small number of trades on the same day and not holding any positions overnight, eliminating some costs and risks.
  • Scalping: placing several trades per day, for a few seconds or minutes, in an attempt to make small profits that add up to a large amount.
  1. How you feel about risk and your attitude towards it

Market prices change all the time, and as a result, even the “safest” financial instruments carry out risks.

Through trading, yes, you can make money. You can, however, also lose money.

So, it all comes down to dedication, knowledge, strategy, and of course, a trustworthy broker.

Just like Bernard Baruch once stated: “In trading/investing, it’s not about how much you make but rather how much you don’t lose.”

Meaning, before you make a trade, you need to understand your risk-reward ratio. Proper risk management is more important than making money. Therefore, deciding your risk limit is very significant when creating your trading plan.

  1. Your available budget for trading

A golden trading rule states that you should never risk more than you can afford to lose. It is a fact that trading involves high loss risks that everyone should be aware of when trading.

Therefore, in your trading plan, it is highly suggested to underline the amount of money you are willing to invest in. Write down the numbers and do the math accordingly, in order to make sure you can afford the maximum potential loss on every trade.

If you don’t have enough trading capital to start right now, practice trading on a demo account until you do.

Many brokers (EverFX included) offer demo accounts in which you can practice before actually investing real money in a stock.

  1. Personal risk management rules

Many details in your trading plan will depend on the market you want to trade. A forex trading plan, for instance, should be different to a stock trading plan.

In this case, your key should be education. When it comes to asset classes and markets, try to learn as much as you can about the one you want to trade.

For example, check out when the market opens and closes, the volatility of the market, and how much you stand to lose or gain per point of movement in the price. If you’re not happy with these factors, you may want to choose a different market.

The world-known businessman and trader Paul Tudor Jones once stated: “The secret to being successful from a trading perspective is to have an indefatigable and an undying and unquenchable thirst for information and knowledge.”

At EverFX we offer our clients a massive selection of informative content regarding trading and where to start.

Besides the helpful material, our team is always available to assist new and existing traders with their investments.

You can check out the material provided by EverFX here.

  1. Your steps for record-keeping

If you want to create a successful trading plan, it is highly suggested that you also keep a trading diary. Document and your trades, track down the technical details such as entry and exit points, and also make notes on your trading decisions and emotions that lead to those trades, as well as their outcome. The more you write down, the more data you will gather up that will be potentially used to perfect your trading strategy.

Conclusion

Most trading experts suggest that traders should not risk losing money until a trading plan is made. This is because a trading plan should be a researched written document that guides the trader’s decisions.

Ask yourself the below questions when preparing your trading plan.

–       What is my motivation for trading?

–       What is my time commitment?

–       What are my short, medium, and long-term goals?

–       What is my risk-reward ratio?

–       How much trading capital am I going to set aside?

–       Which markets will I trade?

–       How will I review my trades and performance?

Ready to start using your trading plan? Open a live account with EverFX to start trading today, or open a demo account to practice in a risk-free environment!

 


Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances or needs.

Risk Warning: Our products are traded on margin and carry a high level of risk and it is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved.

Categories: News , Education , Trading

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