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How To Develop A Trading Plan

As a new trader, your getting access to your first account and deciding where and when to place your first trade is one of the most thrilling experiences. In their excitement, many traders even neglect to read the education resources offered by their broker. Some of these resources include important information on how to navigate the platform; but in their haste to get started, many traders decide to learn on the job.
It's understandable. Besides the financial gain, the sheer thrill of trading is what does it for many people. However, trading without a plan is a sure way to lose money on the markets and have your trading career cut short. New traders should restrain themselves from splurging on trades and first develop a trading plan.
A trading plan serves as a trader's roadmap in the unpredictable world of financial markets. It provides structure, establishes clear guidelines, and sets the boundaries within which a trader operates. Without a well-defined plan, traders are susceptible to the whims of market volatility, emotional decisions and impulsive reactions. In this article, we will explain how a thoughtful trading plan allows you to approach trading with clarity and discipline.
How To Develop A Trading Plan

Establishing Trading Goals

Having clear trading goals brings a sense of direction and purpose to what you are trying to do. They direct your activities and give you a benchmark against which you can measure your success. Without well-established goals, you could easily find yourself drifting aimlessly in the vast sea of trading, prone to making impulsive and expensive decisions. Whether you are trading in FOREX, stocks, commodities, or cryptocurrencies, the dangers are similar and real. Here are some points for you to consider as you decide on your trading goals:

Short-Term vs. Long-Term

In the same way as we have become so used to setting the GPS navigation for our everyday trips, the horizon you want to get to as a trader acts as your GPS tracking. If you go for a short-term horizon, it could take daily or weekly trades. A long-term view might lead you to hold assets for months or even years.

Profit Objectives

How much do you want to make? Becoming a millionaire is something everyone would want, but what is realistic? Setting clear and achievable profit targets ensures you don't get swayed by market euphoria or sink into despair during downturns. Don’t aim too high or too low.

Risk Management

Trading is inherently risky. However, managing and deciding the level of risk with which you're comfortable can set you free. Responsible risk management involves determining in advance the percentage of your portfolio you're willing to lose on a trade. By doing this, you won’t be putting your entire cashflow on the line. If you want to learn more about risk management, click here.

Market Analysis Techniques

To navigate the fast-paced rush of financial markets, traders employ various analysis techniques. These methods offer insights into market behavior, forecast potential price movements, and help traders make informed decisions. Remember, even if you have decided to try copy trading, you still need to have a trading plan. Here are the most common techniques:

Fundamental Analysis

Fundamental analysis is like peeling back the layers of an onion to understand what's inside. It involves evaluating the intrinsic value of an asset by examining related economic, financial and other qualitative and quantitative factors. It’s a good idea to follow business news channels, as analysts often provide useful advice. Always remember, global events, such as geopolitical tensions, central bank decisions or even natural disasters, can sway markets.

Technical Analysis

If fundamental analysis is about understanding the “why” behind price movements, technical analysis is about deciphering the “how.” It’s all about studying price charts and using statistical measures to predict future price movements. Traders scrutinize historical data to identify patterns, trends and key levels of support and resistance.

Sentiment Analysis

While fundamental and technical analyses focus on logical and statistical aspects of trading, sentiment analysis taps into the emotional pulse of the market. Trust us, in time you will find that the financial markets are one of the noisiest, rumor-led marketplaces out there. Keep an eye on news headlines, investor sentiment surveys, and social media posts.

Designing a Trading Strategy

A trading strategy lays out a detailed approach you will take in the market, based on your analysis and goals. A well-thought-out strategy considers factors like asset selection, entry and exit points, trade size and risk management protocols. It's essential to backtest any strategy against historical data to assess its validity and adaptability. Write your ideas down, create a worksheet to centralize your thoughts anything that helps crystalize your strategy.

Choosing Your Trading Style

Selecting the best trading style for you is one of the most valuable things you can do. It’s essential. If you refine this before you enter the bustle of the trading arena, you’ll have a better chance of success.
Every trader is unique, with different risk tolerances, goals and time commitments. Choose what works for you. Day trading, for instance, requires quick decisions and involves closing all positions by the end of the trading day. If you can monitor markets all the time, this trading style could be for you.
Swing trading is more relaxed, where traders capitalize on price “swings” over several days or weeks. This might be suitable for the casual investor just trying things. Then there's position trading, a longer-term approach where traders hold onto their positions for months or even years. Each style has its pros and cons, and understanding them can help traders find their niche. Regardless of your choice, be clear on the following:

Selecting Entry and Exit Points

Knowing when to enter and exit a trade is crucial for maximizing profits and minimizing losses. Entry points are often determined based on a combination of technical indicators, chart patterns like Japanese candlesticks, and, sometimes, fundamental cues. You could choose to enter a position when a stock breaks above a resistance level with significant trading volume. Then, for your exit point, many traders feel safer when they decide on predetermined levels where they will close the position.

Stop-Loss and Take-Profit

Stop-loss and take-profit are protective mechanisms in trading. They are essential. A stop-loss order automatically sells a position if the price drops to a certain level. On the other hand, a take-profit order locks in profits once the price reaches a predetermined level. Don’t leave these big decisions to your emotional whims – lock them! Here is some more reading on stop-losses and take-profit

Continuous Strategy Evaluation

The financial markets are dynamic, with evolving trends, patterns, and external influencing factors. That’s why a one-size-fits-all approach doesn't work. One of the most quoted sayings by financial institutions is “past performance does not guarantee future performance.” By regularly evaluating your strategy, you become better at adapting. This could keep you in business for the long term.

Money Management

Good money management involves deciding how much of your portfolio should be risked on a single trade. Most experts would advise you against betting more than 1-2% of your capital per trade. It’s also a good idea to diversify investments across different assets or sectors. Even rock-star traders don’t win every time. Their success is partly down to how they manage their capital.

Setting a Budget

Don’t ever trade with money you can't afford to lose, like emergency funds or life savings. Once you've determined an appropriate sum, the next step is allocation. Instead of placing all your money in a single trade, consider dividing it among various trades or assets, ensuring that a potential loss in one area doesn't devastate your entire budget.

Leveraging

Leverage is a double-edged sword. It could amplify your profits, but it could also gut your capital. It’s true that leverage can be an enticing tool, but you must use it wisely. This is why leverage is strictly controlled by regulators in responsible jurisdictions. Find out more about leverage here.

Diversification

Instead of putting all your eggs in one basket, diversification allows you to spread your risk. If one asset underperforms, it's balanced out by others that might be overperforming. This is one of the most relevant and evergreen pieces of advice any trader can take.

Trading Psychology

Trading isn't just a game of numbers, it's deeply psychological. Emotions like fear, greed, hope and despair can play major roles in trading decisions, often leading to mistakes. It's so easy to get swept up by the ecstasy of short term winnings, only to be crushed by losses.
Successful traders cultivate a mental fortitude that allows them to remain objective and stick to their strategy, irrespective of market highs and lows. You should understand the importance of discipline and patience. We’ll talk about it more next:

Emotional Discipline

Volatility is a natural part of trading. It’s what allows you to capitalize on market swings. In this ever-changing space, emotional discipline is your greatest ally. Don’t be swayed by emotions and don’t move away from your well-crafted strategy. Cultivating discipline allows you to navigate market storms with a steady hand, making decisions that align with your long-term goals.

Overcoming Common Psychological Pitfalls

Overtrading is a common example of traders who are driven by excitement or desperation to recover losses. They try to quickly reclaim lost positions or capitalize on promising trends without performing the proper analysis. The twin devils of fear and greed drive this. 
Fear can paralyze you with caution, while greed can make you hold onto a position for too long, often resulting in lost profits. Recognizing these pitfalls and actively working to overcome them is crucial for long-term trading success.

Continual Learning

The financial markets are always changing, driven by global events, technological innovations and changing economic landscapes. To stay afloat, you must remain on a path of continual learning. 
You must strive to stay in the know through courses, seminars, or self-study. Stay abreast of daily news and be open to new strategies. It is for this reason that en.Arincen.com has a vast library of informative how-to articles, trading guides, and a daily newsfeed.

Record Keeping

Yes, it sounds like a chore, but in the dynamic world of trading, we cannot overstate the importance of meticulous record keeping. Here’s why - maintaining a structured record not only keeps you accountable, but also gives you food for reflection and growth.

Keep a Trading Journal

Imagine having a detailed map that reveals patterns, successes, pitfalls and areas needing improvement in your trading journey. That's essentially what a trading journal gives you. By faithfully noting each trade, the strategies employed, outcomes and even emotional stress during the trade, you can create a database of your actions and their results. This intellectual property is highly valuable because it is the truest reflection of your preferences and emotional traits.

Periodic Review

At regular intervals, be it weekly, monthly, or quarterly, review your journal. This practice takes commitment but can lead to entrenched knowledge, not only of the markets but of yourself. By understanding what's working and what's not, you can refine your strategies, avoid repeating mistakes, and continuously improve your approach to the markets.

Let’s recap

Navigating the volatile trading without a clear plan could end your trading career sooner than you want. Most traders are unsuccessful, with many estimates suggesting as few as 30% of active traders actually make money consistently. The market is competitive and the odds are against you. Is this really the environment to enter without a trading plan?
We cannot overstate the value of structure and preparation. A structured trading plan not only serves as a roadmap guiding you through market volatilities but also instils discipline, mitigating the effects of emotional and impulsive decisions.
Planning is important, but adaptability is equally so. The financial world is ever-evolving, shaped by global events and economic news. In this dynamic environment, the ability to learn and adapt is key. Celebrate your successes, but more importantly, view failures as invaluable lessons, not setbacks. Each trade, win or lose, carries a lesson.

FAQ

Why is a trading plan important?

A trading plan is crucial because it provides a structured approach to trading, reducing the influence of emotions on decision-making. It outlines your goals, risk tolerance, evaluation criteria, and more, ensuring that you have a clear strategy to follow, which can enhance consistency and profitability over time.

How do I determine my trading goals?

Start by defining what you want to achieve with your trading. This could range from generating a supplementary income, saving for specific goals, or growing your investment over the long term. Your goals will dictate your trading style, strategies, and risk appetite. Be realistic and specific in your goals; for instance, aiming for a specific percentage return monthly or annually.

What's the difference between a trading strategy and a trading plan?

A trading strategy focuses on how you'll enter and exit trades based on certain conditions or patterns in the market. A trading plan, on the other hand, encompasses a broader perspective. It includes your trading strategy, but also covers your goals, risk management rules, evaluation criteria, and how you'll continue to educate and improve yourself as a trader.

How much of my portfolio should I risk on a single trade?

This varies depending on individual risk tolerance, but a common guideline is to risk no more than 1-2% of your total trading capital on a single trade. This approach ensures that you won't suffer significant losses from any single trade, allowing you to stay in the game even after a series of losing trades.

How often should I review and adjust my trading plan?

Regularly reviewing and tweaking your plan is essential. Many traders review their plan either monthly or quarterly. The idea is to assess what's working and what isn't, and to adjust accordingly. External factors, such as changes in your personal financial situation or macroeconomic shifts, can also prompt a review of your plan.

What if I'm consistently failing to follow my trading plan?

Not sticking to your plan can be a red flag. It might indicate that the plan is unrealistic, or it could be a sign that emotions are driving your trading decisions. Take a step back, reassess your strategies, and consider seeking mentorship or further education. Remember, discipline is a key trait in successful traders.

How do I handle a series of losses?

Losses are inevitable in trading. Your plan should incorporate strategies for coping with drawdowns. This might include setting daily, weekly or monthly loss limits, after which you stop trading to reassess. It's also crucial to maintain a proper mindset, understanding that losses are part of the journey, and not letting them discourage you or lead to impulsive decisions.
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Adrian Ashley
Adrian Ashley is a seasoned business and finance writer. With a corporate career spanning over 20years, he has developed deep experience in such diverse areas as investing, business, finance,technology and macroeconomics. He is passionate about captu...
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Richard Sine
Richard Sine is a long-time technical editor and writer. His credits include a weekly column in the...
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Bahaa Khateeb
 Bahaa Khateeb is currently the CEO of Arincen, a start-up Fintech company based in Haifa. Baha...
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