What is a trading plan?
In simple terms, trading plan is a framework that guides through our trading process. It clearly depicts the conditions under a trader should enter trades, identify market condition, exit and manage risks. Thus, a trading plan ensures that the trader is focused on their personal strategy and accountability.
How to create a trading plan?
(1) Choose Your Analytical Approach
Analytical approach answers the question, “How do you identify trade set-ups?”. This can include a lot of factors. It can be a combination of priceaction, support & resistance, chart patterns, Fibonacci levels Heike Nashi Candles, Elliot waves etc.
(2) Select Your Favorite Trade Set Ups
A trading set up is the key part of the trading process. However, you need to think of the analytical approach as the event that triggers the trade set up. Here’s an example: imagine you see a special patterns on a chart, which we call a “consolidation pattern”. This pattern is a part of the analytical approach. When you see this pattern, it tells you what to do next as a trader.
You might want to trade when the price breaks out of this pattern, or you can wait for the price to go back a bit before you trade. Therefore, you can combine these strategies, but only after the chart pattern has fully formed.
Trade setups depend on many things that when put together, make it more likely for you to have successful trades. If you’re new to forex trading, it might take some time to figure out the right trade setup for you. However, it’s really important because finding the one that suit you best is key to being a successful trader.
(3) Limit the Market to Focus on
Secondly, for beginners, it’s crucial to keep their attention on just a few markets. Each market behaves differently. And by narrowing down the number of markets you follow, you can grasp the unique features of each one. You can even concentrate on particular time frames within a single market to become familiar with how it works and its price movements.
(4) Think About Your Holding Period
Thirdly, the choice of timeframes in trading depends on the trader’s style. Short-term traders, like scalpers and day traders, aim to open and close their trades within the same day. Medium-term traders, known as swing traders, typically hold their positions for a few hours to several days.
On the other hand, long-term trading involves much longer time frames, ranging from days to weeks, months and sometimes even years. Each style of trading suits different goals and strategies.
(5) Know Your Risk Tolerance
Every component of a trading plan holds significance, but without proper risk management, the entire plan can crumble. In this phase, traders must identify their personal risk tolerance, which determines how far they’re willing to set stop losses to mitigate potential losses.
At SureShotFX, we share a trading risk management guidance to all our premium members. We send trade set ups in our premium channels depending on our trade team’s analysis. However, we also encourage everyone to know when to exit a trade. We can provide you a good set up to make profit, but you need to know when to exit a trade based on your trading balance.
We found that traders who maintained a proper risk management and trade management were three times more likely to achieve profitability compared to those who lacked a clear risk-to-reward strategy.
(6) Plan How You Will Handle Adversity (& Success)
Every trader will inevitably face the challenging period known as a drawdown. It’s crucial for traders to establish a set of rules to guide them when this occurs, helping them manage their emotions effectively.
Therefore, one practical approach is to predefine a specific monetary amount or a percentage of losses that would trigger a pause for reflection and analysis. It’s important not to establish this figure in the midst of a drawdown but to set it in advance. This proactive measure can prevent impulsive decisions and promote a more rational response to setbacks.
Now, onto the positive side – what to do when trades are going well. Having confidence is a positive trait, but it’s important to avoid overconfidence. When the market is moving in your favor, it’s natural to consider increasing your risk or exposure, but this should be done cautiously and in moderation.
(7) Have a Routine for Staying on Track
Traders should allocate time for reviewing the week’s activities and analyzing their individual trades. It’s advisable to consistently assess the trading plan and make adjustments as needed. Regularly reviewing and journaling your trades is an effective method to ensure that you are adhering to the process outlined in your trading plan.
It’s a good practice to take notes or save charts related to both successful and unsuccessful trade setups for future reference.
Initially, trading plans should be relatively inflexible, providing a sturdy framework to operate within. However, as traders gain more familiarity with the specific market they are focused on, these plans can become slightly more adaptable.
The primary purpose of a trading plan is to provide a solid foundation and clear boundaries for your trading activities.
Trading Plans: A SUMMARY
- Create a Trading Plan: Establish a clear framework for your financial market activities.
- Stay Disciplined: Discover what strategies work best for you and stick to them.
- Track Progress: Keep a trading journal to monitor your performance and periodically review your plan.
- Learn More: Check out our free channel for more insightful posts about trading forex!