A trading plan is your own personal decision-making tool, which helps you decide what, when and how much to trade. Without a trading plan, you’ll be at the mercy of your emotions and gut feeling. Developing a clear and consistent trading plan and sticking to it are two main pillars of trading discipline. To ensure that you are not trading based on misguided psychological motives, you need to have a solid trading plan in place. In this article, we will go through four key components to creating a successful trading plan.
A trading plan is a set of guidelines that shape and define your trading behavior. It serves as the objective guidance for trading the markets and reminds you of your short and long-term objectives.
Prior to trading you should set out your trading ambitions and objectives in terms of risk ratio and expected profits. Look at, and assess your financial goals and timeframes for reaching each trading goal, whether weekly, monthly or annual. Evaluate them regularly to see if you are on the right track or whether you need to make some amendments on your plan.
Select your markets based on your knowledge and expertise. It’s better to trade markets and financial instruments that you are familiar with. For example, you may be only focusing on the EUR\USD, or perhaps the EUR\USD and GBP\USD. Make sure to clearly state this in your plan. Moreover, it’s essential to be are aware of each market trading session and hours.
One of the most critical components of your plan is capital management. Before entering into a transaction, you must determine the risk ratio you can afford. It’s important to know upfront what are you willing to risk. Remember, you are in full control of how much risk is assumed on a specific trade. You must identify your entry and exit points as well as set your stop loss and profit targets while leaving room for amendments without getting wrapped up in emotions. This way you will be able to manage both the losing trades and the winning ones.
One of the best practices successful traders follow is keeping a detailed log of their trades (gains and losses). This is important because it allows you to analyze the effectiveness of your plan and identify what you should do to improve your performance. Write down details such as the entry and exit points, total profit or loss, targets, average time per trade and final notes on each trade as well as the lessons learned.
A trading plan is essential not only for beginners but also for the most seasoned traders. In essence, a trading plan will outline your overall short and long-term goals as a trader and will provide you with a clear checklist of how to achieve them.
And remember, if you fail to plan, you are planning to fail.