NAIROBI, Kenya, March 16 – Plan your trade your plan is a common terminology used by professional investors. A trading plan acts as a light of guidance or the holy bible in the financial markets. It can be a deciding factor regarding trading failure or success.
Beginners and amateurs should understand that in an industry where only 5% succeed, you must pre-plan all your trades. A trading plan consists of all the rules you should adhere to while speculating the markets. There is no room for violations. The regulations can differ from trader to trader depending on the strategy. The MT5 platform is a good choice for traders who’d like to execute their trading methodology efficiently.
The need for a trading plan
The benefits of a good trading plan are never-ending. Here are a few to note:
- It can help you in becoming a disciplined and consistently profitable trader much faster.
- You will not get affected by a few occasional losses. In fact, you will use the lessons from the losers to build a strong trading foundation.
- You can easily remove the market noise.
- A trading plan can act as a light guiding you on your path to success.
- The most important blessing is that a trading plan can control your emotions, such as greed, fear, euphoria, etc…
Getting to the point
While it may seem like an intimidating task creating a trading plan is quite easy. Remember that creating a solid trading structure will help keep you away from margin calls and liquidation. Here are some steps to create a good trading plan:
- Analyze the situation
- Have a solid mindset
- Point out your goals
- Risk management
- Identify the markets
- Entries and exits
- Journaling
- Diversify
- Get disciplined
Analyze the situation
It is important to analyze your skills before tackling the markets. Traders need to spend hours in front of the screen before expecting to generate profits. Without a solid plan, your account may reach zero.
Have a solid mindset
Trading psychology constitutes nearly 80% of the total trading regime. Feelings of greed and fear can result in a margin call on your portfolio. Traders should act like a robot in front of the trading screen.
Point out your goals
Make short and long-term goals in your trading regime. Would you like to achieve 5% or 10% in a month? What is your yearly target? Be transparent with your objectives.
Risk management
Professional market participants always pre-plan their risk before placing a trade. The best traders in the industry do not recommend risking more than 1-5% of your total account value on a single trade.
Your trading plan should include a daily max drawdown threshold. As the limit is hit, you stand up and walk away from the desk. The famous proverb live to fight another day holds its value here.
Identify the markets
You cannot build the same trading plan for cryptocurrencies and stocks. It can even differ between instruments in the same sector. For example, the strategy for trading GBPUSD and EURUSD can vary due to different volumes and volatility between the two instruments.
The best step is to educate yourself on all aspects of trading. We can name a few: spreads, volatility, liquidity, risk management, mindset, and strategy building.
Entries and exits
The trading plan should clearly indicate the entries and exits of any given trade. Without a pre-planned scenario, traders can be seen making rash decisions while the position is open. This also allows their feeling to interfere with trading.
Journaling your trades
While we put it in the last place, journaling is still one of the most important aspects of any trading plan. Note down each trade manually on a piece of paper. As you pen down the mistakes, there is less chance you will commit them in the future.
Professional traders recommend keeping a manual and an automatic journal. The latter can include some important performance metrics such as drawdown percentage, monthly gain, win rate, average profitability, etc.
Diversify
Spread out your investment across multiple financial sectors. Invest in every profitable sector. To help you understand, consider the recent collapse of crypto giant FTX. Traders who had all of their assets within FTX lost everything. In contrast, those who had their crypto within different exchanges lost a lot less.
Market knowledge can play a key role here, as you cannot invest in the stock market without adequately knowing the ins and outs of a company. There is a ton of free content on the internet covering all forms of trading.
Discipline
A solid discipline is a key factor for success in all life forms. It holds its true value in trading as well. Wake up one hour early before the markets open. Create a list of all the stocks or currencies in play. Play your trades in your mind before actually executing them on the charts.
Conclusion
A good trading plan can ensure you stay in the game of bulls and bears for the long run. You can still lose even after creating a solid plan if you do not adhere to set rules. Consistency in trading is only achieved when you go through constant trials and tribulations. In case of doubt, there is always an option to use a demo account for practice.
