Trading plan is like a business plan that every company has, no big company has ever succeeded without a strategic business plan, because this is the heart of their business, a system they follow specially in times of dilemma, it is a specific outline of their objectives for the future and the expected path to reach those goals. Many books neglected to include the topic about having a good trading plan, but I do believe that it is the far most important that everybody must be aware of if you want to compete with the best traders in the world. So if you want to become a successful trader, you must also have an effective trading plan and in this post I will give you complete guidelines to start.
In plain language, trading plan is a set of rules that will guide the trader in the market. It will outline all the what, when, where, why and how of the trader before entering a trade in the market and how a trader will go out in the market. This will measure the performance of the trader in a very clear and straightforward manner on a running basis.
1. First component of the Trading Plan is your “Trading Objectives”. You must be clear of what you want to achieve trading the financial market and make sure that it is measurable and achievable. For example you want to earn 5-10% a month.
2. Next is “choosing your market and instrument”. You need to focus in a single instrument and market first especially if this is your first time to trade because this is where you are going to focus your research, you can always add again if you are familiar with your first product already. You can choose forex, stocks, and commodities. Would you like to trade options or futures. For example is to trade forex spot market and focus on EUR/USD so your research will focus on all aspects that affect the Euro and US dollar.
3. Establish your “trading time”, so that you can identify which type of trader you want to be, is it a day trader, swing trader, scalper or a long term trader. For example, if you decided to do full time trading then you can be a day trader.
4. Now that you know already what kind of trader you want to be, the market you will trade and have very clear objective, next is determining your “risk capital”. How much are you willing to start, and if you lose in the first round, are you still going to put more capital and how much. It is advisable that before you put in real money trading make sure you have traded demo first in your broker and you are already comfortable with your trading strategies.
5. The next thing that you will need to include in your trading plan is “choosing your broker and the trading platform, make sure that the product you want to trade and the indicators you want to use is available in their trading platform. Set a criterion of the broker you want to work with.
6. Now that you are set and ready to trade, the last two most important things of your trading plan is your “trading system” this is now where you will do your research on how you will enter and exit the market, what kind of technical indicators and confirmation you will use. If you enter the market, at what point you will exit at profit or what point you will exit if you are losing. Make sure you have backtested your trading system and traded in demo account before you apply this in live trading.
7. And the last and very important thing you must establish is your “risk management” this is where you will control your trade. Make sure that your risk per trade is in accordance with your risk capital, do not over trade, and your exit point might be too high if you are losing that you cannot enter another trade. Even though you have very effective trading systems but poor risk management, your overall trading performance will be very bad.
There you have it, a complete list of your trading plan. If you do not know how to do your first trading system and how to look for good risk management that supplements your appetite, then watch out for my next post. Remember this, trading can be very emotionally charged venture and it affects your trading decisions especially if you are in a losing trade. The trading plan takes that out of the equation. JUST FOLLOW THE PLAN.