Many people think that trading can be reduced to a few rules, always do this or always do that. A trading plan is a comprehensive decision-making tool for your trading activity.
In short, a trading plan is essentially as the name would suggest: it’s a plan covering the setups that have formed or are in the process of forming, and how to act on them.
A trading plan is different from a trading strategy, which defines precisely how you should enter and exit trades.
Here are some steps that every plan should include:
A Trader should have a very prescriptive trading plan with specific levels, entry triggers, risk, stop placement, targets, etc..
–Skill Assessment: are you ready to trade? Can you follow your signals without hesitation?
–Mental Preparation: how do you feel? Do you feel up to the challenge ahead?
–Set Risk Level: how much of your portfolio should you risk on one trade?
–Set Goals: set realistic targets, what is the minimum risk/reward you will accept? Many traders will not take a trade unless the potential profit is at least three times greater than the risk.
–The markets you want to trade: it’s very important to know in detail each project.
–Your strategies: try to implement your strategies and make notes. Assess the results and tweak to further boost the performance of your trade
What are my short, medium and long-term goals?
As an example, I want to increase the value of my portfolio in the next 12 months. To achieve this, I plan to take opportunities three or more times a month, but only when they fit my strategy. I also want to be consistent, to increase my risk every three months if I am exceeding my target, and to continue to learn by reading financial news for at least two hours a week.
Why do you need a trading plan?
You need a trading plan because it can help you make logical trading decisions and define the parameters of your ideal trade. A good trading plan will help you to avoid making emotional decisions in the heat of the moment. The benefits of a trading plan include:
- Easier trading: all the planning has been done upfront, so you can trade according to your pre-set parameters.
- More objective decisions: you already know when you should take profit and cut losses, which means you can take emotions out of your decision-making process.
- Better trading discipline: by sticking to your plan with discipline, you could discover why certain trades work and others don’t.
When trading, unlike driving, there are no rules other than the one we set for ourselves. What this means is that without a frame of reference that controls our actions, it can become very chaotic and our behavior largely inconsistent.
A trading plan can be helpful when is done correctly and, also allows you to move from a system of rules and guidelines to actually taking trades.
Good luck! And see you soon!
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