A professional trader should never even consider taking a trade unless you know how to deal with every single contingency. That is exactly what having a solid trading plan does for you during trading sessions. Having a trading plan helps you monitor your trades, it helps you with the entry and exit of your trades, introduces consistency and it will improve your ability to spot trading opportunities. When you’re writing your trading plan, there are six components that are necessary for an effective trading plan that will give your trading experience a more successful outcome.
Why do You Want to become a Trader?
Firstly, why you want to become a trader is important, because the reasons why we want something are what builds desire causing us to become better and keeps us going crazy during challenging times. The more reasons you have for why you want to accomplish something, the more likely you’re to succeed.
What Type of Trade are You?
The second component of your trading plan is what type of trader are you going to become? Are you a day trader, a swing trader or do you want to become a full-time trader? Are you a technical trader or fundamental trade? What currencies are you going to trade? There are many types of traders, so it’s important to make sure you identify the type of trader you want to be so you can educate yourself and grow in that direction. Above all, you have to make sure that your trading style suits your personality.
Developing Positive Habits
The third component of your trading plan is developing positive habits that you’ll depend on each trading day. These are things that we need to do each day in order to put get our heads in right frame of mind to be able to trade the best we can. Successful trading is all about repeating over and over again the same things that helped you make money yesterday.
Trading Strategy Rules
The fourth component of your trading plan is your trading strategies, in other words, your plan of when to enter and where to exit the trade. This part of your trading plan will define your rules of engagement for entering a trade, what patterns are you going to trade and at what time of the day you should execute your trades.
The fifth component of your trading plan is money and risk management – the cornerstone of every successful trading plan and has to do with your entry rules, exit rules, position size, the risk to reward ratio. Money management can be broken into three parts. First, we have to plan our risk which refers to how much we’re willing to risk on any one position. This is a personal preference that has to do with your risk tolerance, however, it’s advised not to risk more than 1-2% of your trading capital on any given trade. Secondly, we have to manage our stop losses which are based on: at what point my analysis is wrong. Finally, you need diversification, which is making sure that you’re not unintentionally getting overweight in the same trade by trading currency pairs that are correlated and it makes sure that you’re spreading your risk around.
Trade Plan Tune-Up
The final component is fine-tuning your strategy which includes backtesting, forward testing so you know the expectancy of your strategy and record keeping so you can track your trading performance over time. This will help to adjust your strategy when necessary. This part of your trading plan is vital to your longevity in this business because the only constant in the market is that the markets are constantly changing and you’ll need to fine-tune your strategy and update it once and a while.
I hope that by now you’re convinced of the need of having a trading plan, and like any other successful businesses which have business plans so should be the case with your trading business. A planned trade is one that is made consciously and when you make conscious decisions, your odds of success increase considerably. If you’re planning to become a professional trader, developing a trading plan should be the first step before getting your feet wet in the markets.