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PR01 - What is a Trading Plan?

"Whether it is trading or playing a game of chess or just planning your life, there has to be a plan in the first place. A plan is like a general guideline that is drawn upon to help you achieve your objective. In the same context, a trading plan is a guide that will help you to stay focused to achieve your objective. Of course, having just a trading plan is not sufficient. Traders need to follow their trading plan as well. As you can start to realize, a trading plan is something that is essential to your long term success. The pros of following a trading plan far outweighs anything else. You may be great at reading charts or understanding the fundamental aspects of trading. But all of this is pointless if you do not have or follow a trading plan. This article gives you the basic idea of what a trading plan is how you can build your own trading plan when trading forex."

A trading plan, as the name suggests is a plan that allows traders to follow a systematic approach to trading. It takes into account various factors ranging from the instrument to trade to risk factors as well as how much of capital you are risking on the trade.

A trading plan is one of the most essential aspects to trading. Without a trading plan, you can be bound to lose your money sooner than later. Yet, many traders struggle to build a trading plan. Even if traders are able to build a trading plan, following through with the plan is often an issue.

Firstly, a trading plan allows traders to get an idea on the amount there are risking in order to achieve an investment or a trading objective. A trading plan helps traders to remain focused and also gives an objective outlook of the markets.

Because emotions can wreak havoc with trading decisions, a trading plan is essential to maintain one’s objectivity about the markets.

How does a trading plan work?

There is no single trading plan. Therefore, a trading plan can change depending on the trader, the markets they are trading, the capital they are investing and their risk tolerance. Thus, a trading plan is unique in every aspect.

A trading plan starts by the trader looking at the markets. This typically starts with the fundamental analysis which then leads the trader to filter out the markets they want to trade.

Once a short list of instruments are made, the next step is to make use of technical analysis to further filter the instruments. Once you are left with the instruments that you are likely to trade, the final step is to look at your entry, exit levels.

This can be done depending on the amount you want to risk per trade.

This will help you to determine the amount of capital you want to invest per trade. By doing so, traders are able to diversity their risk across the different trades.

When the plan is created, you will of course also be setting the orders in the markets. This can either be pending limit or stop orders or they can also be market orders. It is recommended that traders stick to pending orders rather than market orders.

This is because, market orders can bring about some level of emotion in the market. This can be an easy way to not follow your trading plan.

Tips on creating your trading plan

As we mentioned earlier, every trading plan is unique. Therefore, do not try to imitate someone else’s plan. On the contrary you need to spend time in building your own trading plan.

Generally, it is best to build a trading plan when the markets are closed. But given the fact that the forex markets operate on a 24 hour basis, it is ideal to build a broad plan over the weekend.

This will give you the time to assess the markets and also to take your own time and to prepare for the markets before they open.

One of the first things to ask yourself is why you would be choosing those currency pairs that you want to trade. Answering this question can bring about a lot of clarity. Trading with a reason and further justifying your trade levels can be a great way to remove emotions from the game.

The next thing to focus on is to understand how much profits you are going to make if you are right and of course, how losses you will make if you are wrong. This will give you a basic assessment of both the upside and the downside potential.

Using this strategy, allows you to also set your risks accordingly.

Many traders try to build up complicated trading systems and trading plans as well. But this isn’t the way to go. Sometimes, the best trading plans are those that are the most simplest.

The same gives with a trading strategy as well. Complicating your trading plan or your trading strategy will not give you an edge in the markets. Traders need to bear this in mind when trading.

Lastly, a trading plan is efficient only as long as you follow it. Therefore, traders need to make a conscious effort to follow their trading plan to the dot. Doing a weekly assessment of your trades and your trading plan can also give you valuable insights.

Remember that trading needs to be treated with discipline. A trading plan can help you to build this discipline.

Read 962 times Last modified on Tuesday, 09 July 2019 10:26