Laying Bare The Rules Of A Trading Plan And Why You Need One To Trade Profitably

Before embarking on their voyages, all seamen, including the famed Christopher Columbus, chart the course of their journey. The ocean is a vast expanse and getting lost takes no effort at all and to achieve anything during the expedition, getting lost is not an option.

The ocean is very similar to the trading world. It is a vast arena made up of thousands of players from across the globe and all of them are out to make money from their investments. However, few actually follow any sort of laid down strategy and as such, most fail.

If you want to be among the few winners, you need to operate differently. Like Christopher Columbus, develop a strategy and plot your course through the markets. Follow it to the letter and watch as your trading portfolio grows exponentially.

It takes time to study the markets and come up with a trading plan. However, hold on because it will be worth it in the end. Read on and learn why a trading plan could spell your success or failure in trading. Also, discover key steps crucial to developing your trading plan.

What Is A Trading Plan?

Trading plan

Like all strategies, a trading plan outlines, in general, the goals you aim to achieve while trading and how you plan to do so. Trading is no get-rich-quick-scheme, and therefore, a trading plan caters to the long-term future.

All trading plans spell out the guidelines that you will follow while trading and also defines your trading conduct in a nutshell. Some crucial details in trading plans include your money management procedures, financial goals, your modus operandi for risk management and how you open and close trading positions.

Your trading plan is also mindful of the technique you decide to employ while trading. The type of trader you choose to become significantly influences not just your goals in the business, but also how you go about trading. Day traders operate differently from swing traders, position traders, and scalpers. Therefore, different traders usually operate with diverse strategies. In a nutshell, stick with what works for you.

One important thing to note is that there isn’t a successful trading plan developed in a single day. Successful traders are persistently developing and tweaking their trading strategies. This is because world markets are dynamic and every day presents new opportunities that could mean a profit or loss. You have to be ready for any eventuality.

Why You Need A Trading Plan

Trading markets regularly operate on predictions for future prices. Usually, a lot of buying takes place when prices are on the lower end. Buyers believe that these prices shall eventually rise and when the time comes, they sell.

For traders, this is the most basic principle to follow. A trading plan further outlines all the activities you are going to undertake as you seek to generate a profit from the venture.

Any trading plan should show you the way to success. Having a plan of action is beneficial in so many ways.

For starters, a plan directs your success in trading as you work toward achieving your goals. If you wish to succeed in trading, then planning for the future ought to take up a large chunk of your time as well as developing a trading plan.

Other reasons why you need a trading plan are outlined below:

Train your focus on meaningful trades

Without a trading plan, you are bound to make several trades, most of which won’t amount to anything. However, if you were to consider the trades that you follow through carefully, then the chances of such failures tend to reduce.

Once you decide to regulate the number of trades you make for your preferred timeframe, you will be able to dedicate more of your time analyzing the select few actions.

Analyzing your potential moves helps draw a better picture and provide likely scenarios set to occur. You will be in a better position to decide then which path to follow. Generally, if the prospects of reaping from a trade are low, you abandon the move altogether.

While you focus on only those trades worth your time, you potentially abandon losing moves. These would have otherwise cost you not just your money, but also time and resources that could have been essential while following through a possible winning trade.

Reduce the chances of emotional trading

Having a plan means that every move you make is calculated. Emotions have proved numerous times to be the downfall of men. Even in trading, once you allow your feelings to take over decision making, you are bound to fail.

Emotional trading is rampant among beginners as they seek to recover amounts lost through prior trades. Re-entering a market without a strategy is unwise, as the likelihood of you analyzing the previous losing trade is improbable to begin with.

Avoid as much as possible trading with your instincts, but consider the facts and data available. Failure to which, you will probably make the same mistake without gaining as much as a lesson in trading.

Always have a plan so that you reduce the chances of you losing money chasing losses. You must plan for failure as well and your course of action in the event you lose out on a trade.

A trading plan lessens the chances of burning your account

The primary reason for planning your trades is to generate a profit while keeping your capital intact. Every trader aims to make decent earnings at the end of the day and hence the main reason for drawing a trading plan.

A well-thought-out plan has the potential to generate decent returns. Everyone who gets into the trading business does so with the ultimate goal of growing their portfolio.

Operating without a plan increases the chances of sinking your account’s funds in pointless moves. Just like shooting from your hip, the chances of you hitting the bullseye are slim with such a strategy. Sooner or later, you will run out of bullets and you might as well give up the fight.

Gambling and trading are worlds apart. Without a reliable MO, there won’t be much to differentiate you from a gambler who relies on their gut feeling. You need to enter the game with a solid plan of action. If you don’t have one, then prepare to waste precious time, energy and resources towards a fruitless venture.

Trading without a plan is like sailing without a map. You won’t get anywhere anytime. Instead, you are bound to expend precious resources chasing the wind that you shall eventually run out of steam.

Aimlessly sailing wastes your time and resources. Likewise, trading is unforgiving to those who operate without laid-down rules. You might as well give away your money if you are entering the market without a strategy.

A good plan outlines your market entry and exit strategy. Ideally, you should enter a trading position when the prices offer value for your money and exit when the conditions are still favorable.

Developing A Trading Plan

Trading plan

When you are armed with an all-inclusive trading plan, there is little that can stand in the way of you making a profit. Before then, you first need to come up with a foolproof strategy that will guide you along the way to successful trading.

While developing a trading plan, there are several items that you need to account for. We shall consider these factors in a series of questions that you, as a trader, can ask yourself in the course of coming up with a trading strategy.

·         Why are you trading?

Are you looking to invest your extra cash? Is trading going to be your primary income source? Or are you simply in it to make tons of money? Carefully consider your answer as this will ultimately decide the trading route to follow.

There are a ton of ads online that promise quick riches while trading. If these guys got to you, you need to re-evaluate your trading plan. Trading, like any business, takes time and patience to grow in. You are going to need incredible luck to generate the kind of wealth you see in those ads, more so in record time.

One of the first lessons you need to understand about trading is that a lot of people lose money because of these ads.

Once you know why you want to get into trading, you can then move on to setting your financial goals. These should be realistic and line up with your intended trading timeframe. There is no way you are going to become a millionaire overnight, so forget about overnight riches.

·         What are your strengths & weaknesses?

To come up with a dependable trading approach, you have to put into account your strengths and weaknesses. As always, capitalize on your strengths and try to work on your weaknesses.

One shortcoming that hinders not just traders, but humans the world over is greed. We always want things the easy way but are reluctant to get down and dirty. That is why a lot of people get scammed out of their money with the promise of making quick bucks trading.

Take control of your greed and learn from the mistakes of others. Trading can be a zero-sum game if you do not capitalize on your strengths while limiting your flaws.

·         Do you have enough money to trade?

To trade, you first have to raise the minimum capital as stipulated by your broker.  This is just the first step to the trading world. You will also need the resources and tools to monitor market trends. Trading charts help you examine the prevailing market conditions. Some are free as others need to be paid for. The latter typically contains verifiable data in real-time so go for one that aligns with your trading goals at the time.

How To Make A Trading Plan

Trading plan

The best way to make and follow through with your plan is to write it all down. Have a journal beside you during the planning process. This way, you can record probable moves and references as you construct your trading strategy.

These items should guide you as you construct a thorough trading plan:

1.      Pinpoint your Trading goals and objectives

Write down what you want to achieve by trading. You will hardly find a fellow trader who trades with similar motives as yours. In this step, do not follow the crowd as you will ultimately be trading for the wrong reasons.

2.      Identify your preferred market and narrow in on a trading timeframe

Trading offers access to several markets in which you can trade in. Go with what is convenient for you and suits your level of knowledge and expertise on the same. Do not work on assumptions but always try to learn the facts surrounding different markets before settling on one.

3.      Identify entry and exit signals

As a beginner, you need to understand the essence of order while trading. Seasoned traders tend to monitor market trends for quite some time. Doing so will help you get a feel of how the market moves, and when the conditions are right, solidify your conviction as to the trade you are about to undertake.

Additionally, specify your entry and exit signals. You need t now precisely when to enter and exit a position to realize the best returns. Clearly describe your entry signals and adhere to them.

Indicators come in handy when describing market conditions, and you are encouraged to use them. Whatever trading indicators you decide to utilize, make sure that you include them when describing your entry points.

The same applies to exit points. Once you get through to entering a trade, you need to know when exiting the same will realize the best reward for your effort. Patience is critical while trading as you would not want to close a winning trade because of mere impatience.

4.      Recognize your risks and weigh them against the reward

Trading bears risk just like other businesses. Understand this and figure out how much you are willing to lose in the process. While trading, losses are inevitable and anyone who tells you otherwise is probably pulling your leg. Nevertheless, the secret to success in this field is managing these shortcomings.

Before entering a position, set your limit and only spend what you are willing to lose. Emotions often tend to get in the way of many trades and these could go end up as a profit or loss. However, there are a pair of tools that help traders with managing trading risks.

Stop-loss and take-profit are essential to every trade initiated. Stop-loss is, however critical and will define how much you are willing to lose in the deal so be sure to include it in your trades.

Weaknesses Arising From Trading Plans

This article has exhaustively indicated why you need to have a trading plan. However, creating one is only the first step in your trading journey. You need to actualize your projected trading approach to realize its benefits.

A trading plan is mainly a theoretical document that guides you as you trade. The actual work lies in following up the design with actions.

While they look good on paper, most traders falter when it comes to actualizing their trading strategies. This is mainly attributed to the pressure that comes with high-frequency trading decisions. As markets are increasingly dynamic, traders are often required to make fast decisions in the face of price movements.

If you trade on lean timeframes, you will often have to decide as fast as you can whether to hold a position or sell before prices change. The likelihood that you make impulsive decisions is quite high, especially for newbies. Granted, this is a recipe for disaster as you deviate from your laid-out path.

That is why traders need to evaluate their trading style regarding not just their financial goals, but also their experience level at the time. Any successful trader went through a gradual learning curve and you won’t be any different.

Your trading plan is the only way you can learn the art of trading and become a guru while at it. Therefore, create a practical step-by-step guide that will be straightforward when the rubber hits the road.

Remember, different traders follow varying strategies, and what works for you probably isn’t compatible with other traders. Remember, if you aren’t losing money, you are on the right path so stick to what works for you.

The Takeaway

If you want to succeed in trading, plan your actions to the letter. Such a plan should be extensively documented in your PC or even on paper. You can also hang the strategy somewhere visible to continually remind yourself of your goals and the path to achieve them.

When creating any trading plan, you need to consider a wealth of information. This should help you create a clear picture of what to expect in the markets. Also, you will understand all the risk involved in the venture and ultimately create realistic goals.

A comprehensive trading plan is a valuable asset that could determine the success of your trades altogether. Besides creating one, you also need to adhere to the strategy to realize your projected achievements in the operation.

As you have seen, coming up with a trading plan is no mean feat. However, do not skip the process because it will be far much easier to trade with a plan as opposed to having none at all.

Like Columbus, having a sense of direction is a sure way of guiding you towards your goal. So therefore, get started plotting your trading strategy. As you adhere to the steps discussed in this article, watch as your confidence swells while trading. Moreover, get a much-needed confidence boost through it all.

Paul Mukara
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