How to Create a Trading Plan
Trading can be a very profitable and life changing career choice. But it is not an easy profession to get in and be successful with it without work and planning.
A trading plan is a must-have component of a trading business. It will give you a blueprint of the things that you need to do to make you trading business cost effective and profitable. It will tell you when to which market is best to trade on at a particular time, when you should be looking to cut costs and where to make profits.
There are many trading plan templates out there which help you by providing you with a shell where you can insert your data to make one for yourself or you can check out any sample trading plan which will show you the necessary ingredients to make you very own effective and efficient plan for you trading business.
What is a Trading Plan?
We have established the fact that we need a trading plan in place so we can actually see profits in our trade. The question does arise that what exactly is a trading plan that we have been talking about so much.
A trading plan is a blueprint for you trading business setup. It is a complete guide which tells you when, where and how you should be making your trades.
A trading plan is different for every individual because of the factors such as one’s style, goals, risk tolerance and how much capital is available to him/her. Another factor that will change the trading plan for every individual is the choice of market to trade. Each market has its own trends and volatility. The choice of market will play a big hand in determining the data present in your trading plan.
Why do you Need a Trading Plan?
Although it will help you in better handling your trades, it has many other advantages as well.
Just like in many businesses, proper planning is the first step towards success as it will show you your final goal and how you plan on getting there. Writing things down will provide many other benefits as well. It will help you remain focus on the task at hand and the ultimate goal. We will have a better sight on our trading objectives and the lesser judgement we have to use during the trade, the better it turns out.
A plan will also help you manage your emotions and discourages bad decisions done under the influence of emotions. It instills discipline and encourages one to be consistent in trading.
How to Create a Trading Plan
Now that we know the importance of upfront planning in the trading business, we move towards the part that actually matters in this regard. How does one go about making a trading plan for his/her trading business?
We all have heard the saying that experience is the best teacher and trading is no different. Though there are some well established rules of the business, there is no 100% guaranteed working blue print for everyone to just copy and start trading.
As mentioned above that a trading plan is different for every individual, depending upon the needs of the business, whether is a forex trading plan or a plan for trading in futures. So, a business plan should be tailor made for the task at hand.
Start by using the knowledge that you already know. Having trust in yourself is a major factor contributing in success. If you are looking to just step into the trading business, be sure to do a thorough research on the markets and how they work before any real investment and trading is done. The tools that you choose for your trading setup are the key elements which will decide your plan as well as the future of your business. Everything from the charts you use to the strategies used on each of the trade are a part of the plan.
Use this plan to see what is working for you. Keep on you research. Actively keep an eye on the markets and the commodities. Get used to the economic environment and how it affects different stock markets. Use this knowledge to better your plan. The business plan is formulated through this phase of trial and error. Change the things that are not contributing positively towards your business.
Risks VS Rewards
One of the most important part the plan making process is the assessment of a risk-reward ratio. This ratio is your personal preference, but it will greatly affect how you will be making you trades in the coming future. Decide how much of a risk is acceptable for you. Assess the risk involved in each individual trade as well as in the overall business strategy. Making this risk limit decision is a very important one.
Market prices are always on the move. Some commodities may see highs in their prices when the market just opens and they could be plummeted by the time trading day closes. This property of the trading market alone introduces a lot of inherent risk in the trading business.
Some new comers prefer to take lower risks and try their limited knowledge and luck while other take the riskier way in order to get a chance at higher rewards. It is just a personal preference. One can lose a couple of trades in a row and still turn out to be profitable overall. This will be determined by the risk-reward ration that you have set for yourself. Traders usually like to use a risk-reward ration of 1:3. This means that the potential profit is at least double the amount of potential risk for failure. This will ensure that even in case of a failure, there won’t be much of a blow to the business.
A very important thing to remember here is that these risks can be managed by using stops.
Planning for Forex/Day Trading
We have leant how to make our very own trading plan. But does this strategy work with the world of online trading, such as forex, future and options, EFTs as well?
The answer is yes! It definitely will. Although online trading has different ways to go about trading, the fundamentals are basically the same. Online trading is easier as compared to regular trading where one buys the commodities physically and sell them later with a profit margin. This way is, though still effective, very slow as compared to the one button push trading mechanisms of the online trading community.
Forex trading is just like traditional trading in the sense that you buy and sell contracts for different commodities or currency pairs. The plan for forex trading can be developed by the same procedure. The knowledge of the markets and active monitoring of the ongoing trades is the key to improving, not only your trading plan but also your profits.
In essence, you trading plan should encourage positive practices and mindset. It should be consistent with your goals and needs. It should be coherent with the capital you have and the risk you can withstand. All these elements combine to make a good and comprehensive plan for you trading business which will help you scale and evolve your business to the heights that you have always seen yourself at. All it takes is hard work, consistency and continuous learning. Always keep on learning and always keep on evolving.
