Creating a trading plan
If you’re serious about becoming a trader, a trading plan will be vital. Here we discuss some important assets your trading plan should contain.
Assessing your skill
Have you tested your strategy? Are you confident that it would work? Can you follow your strategy without hesitation? If you haven’t mastered your trading strategy yet, it might be best to practice and tweak it until you’re confident in implementing it.
Mental preparation
Trading can be an emotional rollercoaster, so it’s important that you trade stress-free – if you’re facing personal challenges or not up to the challenge of trading, it would be recommended not to place the trade. Be sure that you only open a position if you’re emotionally and psychologically ready.
Set your risk level
When trading, you should set a risk level that you’re comfortable with. Professional traders tend to risk no more than anywhere between 1-5% of their capital – what you choose should be dependent on your trading style and risk tolerance.
Set yourself goals
Before you start trading, you should set yourself goals in terms of realistic profit targets and risk/reward ratios. As a trader you should set weekly, monthly and yearly profit goals and assess them regularly to see if you’re on track.
Prepare for trading
Before you start each trading day you could follow a series of steps before placing your first trade. For example, research the major news announcements for the day, set up support and resistance zones on your charts, or even read through your trading plan.
Entry and exit rules
Before entering a trade you should know where your stop loss and profit targets are going to be placed.
When entering a trade, the entry should be based on a tested trading strategy. Your trading plan should highlight exactly when and where you are going to enter, what the indicators need to be doing, what the pricing action needs to be doing, and what’s occurring on the different time frames in order for you to enter the trade.
You should then be prepared to exit the trade at your pre-defined target – while it may be tempting to keep the position open if the markets are moving in your favour, they could change at any given moment.
Record everything
Keeping a record of your overall trading performance can help analyse how effective your trading strategy is, and can highlight where you’ve gone wrong if you experience a period of losing trades.
Key information to make note of could be:
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Your entry price
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Your exit price
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Your original stop loss and take profit levels
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The position size
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Comments on why you entered the trade
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Your emotions during the trade
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Your profit or loss
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A screenshot of the chart at the time of entry and exit
Having a plan is crucial if you want to become a consistent trader – never underestimate the power of planning.