- Trading for beginners
How to trade stocks
How to trade cryptocurrency
Guide to Leverage
What is a pip
How to Trade Bonds
Trading Rising and Falling Markets
Efficient Market Hypothesis & Random Walk Theory
How to Spot Forex Scams
- What is a Trading Plan?
- The importance of having a trading plan
- Why create a trading plan?
- Everyone should have a trading plan
What is a Trading Plan?
A trading plan is a set of rules and guidelines that shape and define your trading behavior, including but not limited to: financial goals, money management rules, risk management techniques and criteria for opening and closing positions.
Most of us in our everyday life start out with a plan of sorts, which helps in becoming successful in our accomplishments are personal priorities. In forex trading and CFD trading often our personal decisions translate into either a profit or a loss, and knowing your trading direction could be that fine line between success and failure. If you do not have a trading plan, then you have planned to fail.
Open an account today and start implementing your trading plan!
The importance of having a trading plan
Entering the trading realm can be daunting, at some point as a trader you will lose money as you engage in the buying and selling activity while the markets make their moves. Traders generally follow forex signals, technical analysis indicators like Moving Averages, CCI, RSI or MACD, and/or the daily news to find patterns and changes within the markets. However, planning your trades will reduce the risks of depleting your trading account.
How to develop a trading plan
- Personal analysis: Ensure you are ready to trade and that you are able to follow your signals without hesitation. Find out what are your strengths and weakness prior to entering the trade.
- Trading goals: Start off by writing out your trading objectives and setting realistic goals. Look at, and assess your financial goals and timeframes for reaching each trading goal and ensure that when you have made a successful trade you will close the position, don’t get greedy.
- Identify your markets and trading timeframes: Select your trading trading style and market according to your knowledge and expertise. The best market for you is the one that you are familiar with. There is no sense in entering a trade in a foreign market that you have no knowledge about and assuming it will be profitable. In addition, ensuring that you are aware of each markets trading session hours is necessary, there is a certain amount of attention that these trades need at the important trading times.
- Know up front what you are willing to risk: Every time you open a position or fund your trading account be sure to enter an amount that will be the maximum amount that you will be willing to risk. Again, do not get emotionally wrapped up in the trades, fund the account and stick to the initial balance. Control your finances by means of money management
- Then decide when to open a position and in which direction (buy or sell), this can be determined by analyzing charts or reading up on the latest market analysis.
- Specify your entry and exit points. Meaning you must set your stops losses and profit targets, while providing room for adjustments but not getting emotionally absorbed by your trading.
- Manage your emotions! Do not let your feelings cloud your judgement, treat your trading like a business. (More on Trading Psychology)
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Elements that should be added to your trading plan:
- Profitability goals should be realistic
- How to determine the size of your position according to your trading budget
- Record your trades as a means of keeping tabs, such as what was opened and what was closed in either profit or loss. In traders’ jargon it’s called “trading diary” and it’s a powerful tool to evaluate your overall performance and accuracy of predictions you make.
- How to manage your positions in metatrader 4 or metatrader 5 terminal once they are open and live in the markets
- Impartial criteria that the trader will use for selecting, entering and exiting trades
Stick to your plan!
Questions to ask yourself when planning:
- What is your motivation for trading?
- What is your attitude to risk?
- How much time can you spend trading?
- What is your level of knowledge?
Why create a trading plan?
The same reason as when you start building a house, first you need an architectural blueprint. You would not simply start with buying the bricks and cement without having the correct foundations laid and knowing very well before you enter how much money you have to spend on the house.
It is much the same with trading, even if you have market experience it is not enough to go into a trade blindly. Forex and CFD trading should be treated like a business, that has an organized structure from which it can grow into a successful business.
Furthermore, when there are sudden changes in the markets, the trading plan will assist you with keeping in line with your objectives, and perhaps guard you from making any hurried decisions you could later regret. Trading objectively with your plan in place will allow you to have more confidence and less emotional participation.
Everyone should have a trading plan
Whether you are just starting out in the trading world or you are a seasoned professional, it is always advised to be prepared. A good trading plan will help you in many aspects, such as identifying your goals, organizing your research and finding trading statistics. The decision on which direction to trade in to stay in line with the markets will assist you in managing your emotions when on a losing streak and aid when recovering from a bad trade.
The markets don’t choose who they like, and anyone is at risk, new or experts, and without a plan the market will have no mercy. With more assistance in your day-to-day trading AvaTrade can help you with planning your trades as well as evaluating your risk. Join us now and get the best support 24/5 in your language.
Trading Plan main FAQs
Do professional traders use a trading plan?
Professional traders use very detailed trading plans that they stick to almost religiously. This is one of the characteristics that make them professionals. In addition, the trading strategies included in their plans have typically been rigorously back-tested and improved over time through the use of a trading journal and regular evaluations of trade results. The trading plans used by professionals will have very specific money management criteria, along with specific entry and exit rules.
Does using a trading plan guarantee success?
Nothing guarantees success in trading, but a solid trading plan can help to avoid failure and put you on the path to a more successful trading career. Having a trading plan eliminates some of the roadblocks to success, making it easier to not just place winning trades, but to hone your trading skills over time so that you become increasingly successful the longer you trade. With a proper trading plan used consistently each trade brings you one step closer to becoming a master trader.
Can I change my trading plan?
You will absolutely want to change your trading plan as you become more experienced and learn more about the markets and yourself as a trader. There is little that is static about a good trading plan. It should evolve and change based on changing market conditions and along with the changes in your own trading skills and tendencies. The trading plan should also take your goals into account. You might also find that your entries, exits, stop loss targets, and profit targets all change based on changing conditions.
We recommend you to visit our trading for beginners section for more articles on how to trade Forex and CFDs.
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