A trading plan is an essential component in a trader’s journey so it’s imperative to begin trading with a proper trading plan in place. For various reasons, including its rapid pace, higher volume requirements, and need for technical market knowledge, trading can appear complicated to beginners. This is why traders must have a framework in place to assess trading performance in order to make informed decisions. In this article, we will discuss things that should be incorporated into your trading plan.
Motivation
This is a crucial step in developing your trading plan. First, ask yourself why you want to trade and how much time you’re willing to risk. If you just want to trade as a hobby and don’t want to put in the effort required then you will be at loss. Also, It can be difficult to maintain motivation when trading in the financial markets. One of the biggest errors new traders make is believing that as soon as they open a trade, the money will start rolling in. However, that hardly ever occurs in practice. This is why it is crucial to be sure of the motivations that inclined you towards trading.
Capital
Knowing how much capital you can risk while trading is important. Keep in mind that trading is a risky venture. With a single wrong step, your account may blow up. Also, the size of your trading account determines the level of risk you can tolerate. You must decide how much money you are willing to lose before you make a trade. Further, don’t ever overtrade or trade because of emotions like greed, fear, revenge, etc. Always trade according to your plan and never trade with money you can’t afford to lose.
Exit and Entry Rules
If you don’t know the proper entry and exit points for your trade, your analysis and strategy are not going to be fruitful. Before beginning to trade with real money, practice in a demo account for enough time to become familiar with the proper times to enter and exit trades. Trading won’t result in any profits unless you have mastered trade timing and are aware of specific good trigger points, both of which are based on experience.
Strategy
You will come across a variety of trading strategies but be very selective while picking the one for you. Don’t pick any strategy by looking at others’ success. It might work for them but it is not mandatory that it will work for you too. You must take into account your personality, risk tolerance, preferred time frames, and frequency of a number of trades when selecting a trading strategy.
Timing
Some financial markets are open all seven days while some are open on weekdays. Depending on your trading strategy, pick the trade timing for you. Also, make sure you are free during those trading hours. If you try to trade in a hurry then it won’t be profitable for you. Instead, you can face losses. You can take profit from high volatility as it leads to more trading opportunities. However, if you are inexperienced, high volatility can be very risky. Making a decision on this is a very personal one. It might be preferable to trade when the market has calmed down a bit if you don’t think you can handle a lot of market activity.
Risk Management
Instead of focusing on the amount you can make, emphasise on the amount you can save. Trading is all about managing risk. Not losing money is more important than making money. Sometimes you can be correct and other times you may be wrong. No one can win all the time because of the high volatility of the markets. Make use of stop loss, take profits, set a risk-reward ratio, and don’t risk more than 2% when you’re a newbie.
Trading Journal
Although many people do not give importance to trading journals, it is indeed a crucial step while building a proper trading plan. It will help you figure out the DOs and DON’Ts while trading. Also, when you keep your trading journal updated regularly, it will help you advance more quickly and ultimately improve as a trader. Additionally, a lot of traders begin to make errors but fail to recognize them. Trading journals help in accessing the errors and making the most out of your strategies by reviewing them and fixing any errors.
Overall, it takes extensive planning and training to succeed when trading in the financial markets. All traders must pass through a number of learning stages in order to consistently be successful in trading. When you have a properly streamlined plan in place, it gets easier to reach success. Just like a map navigates you toward your destination, a trading plan navigates you to reach success significantly.