Whether trading is your full time job, whether you devote most of your spare time to trading, or whether you only dabble in trading as a hobby, it’s important to recognise that trading is a business. Check out this link to visit Etrade & get started trading online today.
If you want to succeed, then you will need to not only recognise trading as business, but also treat it as a business as well. That means making a trading plan. Just as you wouldn’t start a business without a business plan, you shouldn’t start trading without a trading plan. As they say, “Fail to plan and you plan to fail.”
What is a trading plan?
A trading plan is a set of guidelines or a structure that defines your trading activity. It includes the steps you must follow when entering and exiting trades according to the rules of your trading strategy. It helps you to focus and adhere to your trading strategy, and it can prevent you from making trading mistakes, making impulsive decisions and overtrading.
There is no ‘ideal’ trading plan that should be used by all traders. Just as each trader must find the right trading strategy for him, he must also develop the right trading plan as well. While there are no hard and fast rules for creating a trading plan, there are certain elements that should be incorporated.
Who needs to use a trading plan?
Everyone from novice traders to professionals should have a trading plan. How much you use your trading plan, or the way in which you use your trading plan is up to you. However, the benefits of having a trading plan in place are extensive.
Benefits of a trading plan
Learn from your mistakes
Using a trading plan means you are documenting your decisions and their outcomes. While you may not succeed every time, documenting your mistakes allows you to look back on where you went wrong, make the correct changes, and avoid making the same mistakes in the future.
Manage your risk better
When you create a trading plan, you decide how much risk you are willing to take. By having your risk structure in writing, it can be easier to stay within your boundaries while trading and avoid risky trades.
Know your entry and exit strategies
One of the most important aspects of trading is knowing when to enter and exit the market. Having it all on paper helps you to define your exit and entry strategies, and stick to them. This can help to reduce stress and adhere to your trading strategy.
With your trading plan on paper, it can help you stay focussed on your strategy and can prevent you from making impulsive decisions – even when the market is volatile. Having a trading plan can help you to stick to your strategy and trust in it.
Keeping close documentation on your trading activity not only allows you to learn from your mistakes, it also allows you to look back and evaluate how well your trading strategy is working, helping you to look at the big picture.
How do you create a successful trading plan?
If you want to create a successful trading plan, you need to ask yourself the right questions. Look at your situation now – including what kind of trader you are, how much experience you have, and how much capital you have to trade with – and look at where you want to be – including what you want to achieve and in what time frame, and what success is to you.
Your trading plan will incorporate your motivation for trading, your attitude to risk, your trading knowledge, and your dedication to trading. Using this information, you can develop a trading plan that helps you to succeed as a trader, and helps you to set and achieve your goals.