creating a trading plan
One of the things that distinguish a successful trader is having a solid trading plan in place. A good trading plan incorporates trading strategies that are going to be used and helps the trader avoid bad trading behaviors and ambiguity that can lead to loss. It is therefore critical for any trader to take time to seriously think out every aspect of their trading plan and write this down.
Just like a business plan in vital for a business, the same is true for trading. Sticking to a well thought-out trading plan will ensure that you are growing as a trader and you will be minimizing your risk and possible loss.
This means that it is vital for your trading plan to cover all the important parts of a trading process. Some critical things that should be included in a trading plan include:
– The starting capital
– Margin, leverage and position size you will use
– The markets you intend to trade
– Percentage of trading capital you will risk in each trade
– Monetary value of each market movement
– Targeted reward-to-risk ratio
– Realistic profit goals (daily, weekly, and monthly)
– Loss limits (amount of loss at which you are not going to trade for a specific period)
– Trade entry criteria that matches your trading strategy
– Techniques of managing open trades
– Trade exit criteria that also match your trading strategy(includes profit limits, stop losses, manual exits, and trailing stops)
Apart from having a trading plan in place, it is imperative that you have a journal of all your trades. This will go a long way in helping you access whether you are following your trading plan or not.
Depending on the strategy you will use, the contents of this journal should include very detailed reasons for entering or exiting a trade, the total profit or loss for every closed trade, and the amount of equity each loss or profit represents.
Having a complete trading plan and keeping record of each trade in a journal helps you discover what is working for you and what is not. You will also be able to find out what can be changed to make you more successful in the future.
Trading without a trading plan and journal is akin to making blind market guesses that will not add any value to you or your growth and improvement. Having discipline to follow a trading plan through and record the results is a sure way or making average traders become great traders in time.