25. How to create a trading plan
You as a trader and as a person are different from someone else. You have your own thought process, mindset and knowledge. You know what you want and you are responsible for your destiny. Too much of philosophy huh… We are trying to tell you that since you are different from someone else, it doesn’t make sense for you to copy other’s trading style. Have your own goals and plans.
Having a trading plan and adhering to it is what we call having a trading discipline. When you have the discipline everything else will automatically fall in place. So having the trading discipline is very very very important. Ask any successful trader in the Forex Market. They would say that their success depends on the plan and guidelines they follow.
A trading plan defines your trading objectives. There is this old saying in business “You fail to plan and you are planning to fail”. If you have a well-documented trading plan, you are well in good condition to start trading. There is still no guarantee that you will succeed, but you are definitely one step closer and at times when your emotions force you to make wrong decisions you can refer back to this plan and take control over your emotions. Why do you need a trading plan in the first place? Let’s touch upon some of the advantages of having a trading plan.
When you plan to travel to some new place, you are very much excited about it. You pack your stuffs and you are ready to go. What if you don’t have a map of that place? Will it be easy for you to get to that place without knowing the direction? No it wouldn’t be easy. Similarly, even with lots of experience in the Forex market, trading without a plan would be very challenging. If you have a plan you start treating Forex trading as your business and you do it with a discipline.
Forex is a fast moving market. If you have your objectives clearly defined in the plan, you can be very quick in taking decisions in case you see a sudden opportunity arise. At that moment you don’t have to think too much on where to start.
No matter what the circumstances are in a market a successful trader never gets panic. He has control over his emotions. The reason is that he has clear objectives set for him to trade. It is not good to trade emotionally. Ups and Downs are part of the trade and you should not be devastated by losses. You can do this only if you have good trading discipline. Traders who trade without a trading discipline do so emotionally.
Thus, advantages of a trading plan can be summarized as:
- It helps you identify your goals and objectives.
- Trading plan helps you manage your day to day trading activities.
- Helps you manage your emotions so that it doesn’t affect your trading.
- Trading plan helps you decide when to take a position and in what direction.
Now, let’s try to understand some elements which are part of a trading plan. First and foremost you should identify a trading style while building a plan. For that you should look at yourself in the mirror. Yes, we mean you should know what suits you. Because it is you who know about your preferences, budget and emotions. You are the best person to decide your strategy and trading style. Ask yourself lots of questions before you come with your trading style.
Next thing which you should think about is the amount of money you can afford as your risk capital. Money which you are ready to lose. At times lack of preparation well in advance results in traders feeling demotivated after they lose money. So, risk capital should be the money which you are ready to lose. There are demo accounts available which can be used until you are well ready for trading.
If you are going to trade in shorter timeframe, you will have to spend more time looking at the market conditions using your charts. In case of day traders for example, you need to spend your whole time affectively trading and analysing. On the other hand if you are trading longer timeframe, you need not continuously keep an eye on the market. So decide on the amount of time you can spend trading and making sure you use this dedicated time affectively.
Another factor which decides the trading style you choose is the kind of returns you are expecting out of the trade. You need to think about this very deeply and carefully and find an answer to it. There is definitely some amount of risk involved, but you should think about the returns you expect to compensate for those risks and to ensure you are profitable in the long run. Once you have an answer to this question, you will be able to identify the currency you want to trade upon, the style you want to choose, the amount of time you can dedicate and even the risks involved.
What will be your daily trading routine? Answer to this question also adds to coming up with a trading plan. In the daily trading routine you can include the pre trading activities you do, any additional activities you do during the trading hours and the post trading activities. When you document all these answers, you will have a clear picture of where you are heading to. And that is what we need trading plan for.
Next important thing which adds into your plan is the tools that you need for your Forex Trading. This includes hardware, software, data feeds, any additional tools and internet access. Yes, and the main thing is to decide upon which trading platform and from which broker. Make sure you clearly understand your broker’s terms and conditions before you decide upon them. Everything including the ease of order execution for example should be checked in detail before heading on.
So, these are some of the things you should think of when creating your trading plan. You can definitely add additional stuffs but we suggest keeping things simple. It is you who are going to refer to this plan while trading. You should be able to see your style and your behaviour in the plan. Last but not the least make sure once you have the plan you adhere to it. And there you go. You will see that you are following a trading discipline and life becomes easier. And yes, keep revising your trading plan based on your experience with it on an ongoing basis.
To summarize, trading plan to a trader is like his road map. When you have a map to see where you are heading to, you are less stressed. When you are stress free you can have full control over your emotions when you make trading decisions. With good trading decisions you can be profitable and you make money. Bear in mind having your trading plan doesn’t guarantee you success, but your job is made easier and hence you have got rid of some unwanted stress. Also, having a trading plan is useless if you don’t follow it. Make sure you follow your plan and apply it while you trade. Good Luck!