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The difference between being a successful trader or an unsuccessful trader often lies in trading with or without a trading plan.
If you’re thinking about trading the financial markets, you need
to start by building a solid trading plan. It will help you maintain
discipline, manage your emotions, and improve your trading strategies as you
gain experience.
In this article, you will learn the essentials about trading
plans, including the crucial steps required to create a plan suitable for your
skills.
Let’s start with a brief definition.
What’s a trading plan?
The insightful guys at babypips.com define a trading plan as “an
organized approach to executing a trading system that you’ve developed based on
your market analysis and outlook while factoring in risk management and
personal psychology."
That sounds rather complicated, doesn’t it? We'll make it
simpler for you: a trading plan works as the general framework for your
trading. It helps you figure out your markets of interest, strengths &
weaknesses, how to enter and exit positions, and how to keep your risks under
control. Also, a trading plan keeps you focused on your strategies and aids you
in recording every step of the way.
Of course, you cannot do all the above without learning the
basics of the financial markets. You can start by visiting the CAPEX.com Academy and watch our educational videos there!
The importance of a trading plan
A trading plan allows you to fully dedicate yourself to your
objectives, that’s the primary thing you need to keep in mind. Also, knowing in
advance what you need to do will make you a more rigorous trader. Additionally,
planning will help you get used to a routine during your trading journey.
What’s a trading plan made of?
To create a trading plan, you need to tick some boxes.
We’ve prepared a list with three steps you should really consider following on your way to building a trading plan:
1. Objectively evaluate your market knowledge
The first step and the most important one is to assess your
trading expertise. How much do you know about the markets? Do you consider
yourself a novice, intermediate or advanced trader? What are your advantages
and disadvantages? What about your favorite instruments?
After you have the answers to all these questions, you’re ready to move to the next step.
2. Set up your trading goals & motivations
Establishing realistic profit targets and risk/reward ratios are
fundamental. Also, you should set weekly, monthly, and yearly profit goals.
Don’t forget to assess them regularly to check and analyze your progress!
Besides all those things, take your time to reflect on what motivates you. Is it just the prospect of getting rich in no time? If that’s the case, you should forget about it. Trading requires passion, commitment, and time investment.
3. Align your objectives to your trading style
Once you’re done with the first two steps, it’s time to see what
you need to do to match your goals to your trading style.
Start by keeping yourself up to date with the latest market analysis sources. Also, make a habit out of following the
global market news. This way, you will develop your trading strategies
faster and see what fits you and what doesn’t.
You can be a follower of fundamental analysis or a technical
analysis practitioner. However, when you’ve gathered enough experience, you can
even use a mix of the two!
But before that, let’s find the differences between fundamental
and technical analysis strategies.
Fundamental and Technical Analysis – what’s what
Some traders adhere to fundamental analysis because
they prefer to trade based on news. Depending on the subject matters it covers,
news can fall into many different categories from economic, political, or even
social. Fundamental trading is usually more subjective because news is
generally open to interpretations.
Traders can also favor technical analysis. This type of analysis
relies on probabilities and uses indicators and statistics to analyze the
markets and develop possible strategies.
After you decide on your preferred trading analysis strategies,
you still have some things left to sort out: timing and timeframes. We will
explain these concepts in a future article since they require in-depth
explanations. For the moment, keep in mind that they all depend on your risk
tolerance.
You’re almost ready to
put your newly created plan to work!
…but we’re not wrapping things up just yet, as there’s one more
piece to complete the puzzle: monitor your every move!
Keeping your overall trading performance in check can highlight
where you’ve gone wrong, what works, and what needs improvement.
Your trading notes should include critical elements such as
entry and exit prices, take profit and stop
loss levels, position size,
and daily results.
Conclusion
The primary purpose of a trading plan is to allow you to make
efficient trading decisions. A plan should be based on your trading style, risk
tolerance, and market knowledge. It requires discipline, patience, and
perseverance to work. Finally, you should never stop improving it for one
simple reason: as you get better at trading, your plan needs to be updated to
keep up the pace.
Sources: babypips.com, Investopedia.com
Users/readers should not rely solely on the information presented herewith and should do their own research/analysis by also reading the actual underlying research. The content herewith is generic and does not take into consideration individual personal circumstances, investment experience or current financial situation.
Key Way Markets Ltd shall not accept any responsibility for any losses of traders due to the use and the content of the information presented herein. Past performance is not a reliable indicator of future results.