What is a Trading Plan?
A trading plan is a set of rules and guidelines that shape and define your trading behavior, including but not limited to: financial goals, money management rules, risk management techniques and criteria for opening and closing positions.
Most of us in our everyday life start out with a plan of sorts, which helps in becoming successful in our accomplishments are personal priorities. In forex and CFD trading often our personal decisions translate into either a profit or a loss, and knowing your trading direction could be that fine line between success and failure. If you do not have a trading plan, then you have planned to fail.
The importance of having a trading plan
Entering the trading realm can be daunting, at some point as a trader you will lose money as you engage in the buying and selling activity while the markets make their moves. Traders generally follow signals, technical analysis and/or the daily news to find patterns and changes within the markets. However, planning your trades will reduce the risks of depleting your trading account.
How to develop a trading plan
- Personal analysis: Ensure you are ready to trade and that you are able to follow your signals without hesitation. Find out what are your strengths and weakness prior to entering the trade.
- Trading goals: Start off by writing out your trading objectives and setting realistic goals. Look at, and assess your financial goals and timeframes for reaching each trading goal and ensure that when you have made a successful trade you will close the position, don’t get greedy.
- Identify your markets and trading timeframes: Select your trading market according to your knowledge and expertise. The best market for you is the one that you are familiar with. There is no sense in entering a trade in a foreign market that you have no knowledge about and assuming it will be profitable. In addition, ensuring that you are aware of each markets trading session hours is necessary, there is a certain amount of attention that these trades need at the important trading times.
- Know up front what you are willing to risk: Every time you open a position or fund your trading account be sure to enter an amount that will be the maximum amount that you will be willing to risk. Again, do not get emotionally wrapped up in the trades, fund the account and stick to the initial balance. Control your finances by means of money management
- Then decide when to open a position and in which direction (buy or sell), this can be determined by analyzing charts or reading up on the latest market analysis.
- Specify your entry and exit points. Meaning you must set your stops losses and profit targets, while providing room for adjustments but not getting emotionally absorbed by your trading.
- Manage your emotions! Do not let your feelings cloud your judgement, treat your trading like a business.
Elements that should be added to your trading plan:
- Profitability goals should be realistic
- How to determine the size of your position according to your trading budget
- Record your trades as a means of keeping tabs, such as what was opened and what was closed in either profit or loss. In traders’ jargon it’s called “trading diary” and it’s a powerful tool to evaluate your overall performance and accuracy of predictions you make.
- How to manage your positions once they are open and live in the markets
- Impartial criteria that the trader will use for selecting, entering and exiting trades
Stick to your plan!
Questions to ask yourself when planning:
- What is your motivation for trading?
- What is your attitude to risk?
- How much time can you spend trading?
- What is your level of knowledge?
Why create a trading plan?
The same reason as when you start building a house, first you need an architectural blueprint. You would not simply start with buying the bricks and cement without having the correct foundations laid and knowing very well before you enter how much money you have to spend on the house.
It is much the same with trading, even if you have market experience it is not enough to go into a trade blindly. Forex and CFD trading should be treated like a business, that has an organized structure from which it can grow into a successful business.
Furthermore, when there are sudden changes in the markets, the trading plan will assist you with keeping in line with your objectives, and perhaps guard you from making any hurried decisions you could later regret. Trading objectively with your plan in place will allow you to have more confidence and less emotional participation.
Everyone should have a trading plan
Whether you are just starting out in the trading world or you are a seasoned professional, it is always advised to be prepared. A good trading plan will help you in many aspects, such as identifying your goals, organizing your research and finding trading statistics. The decision on which direction to trade in to stay in line with the markets will assist you in managing your emotions when on a losing streak and aid when recovering from a bad trade.
The markets don’t choose who they like, and anyone is at risk, new or experts, and without a plan the market will have no mercy.
With more assistance in your day-to-day trading AvaTrade can help you with planning your trades as well as evaluating your risk. Join us now and get the best support 24/5 in your language.