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.

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

Emotional Discipline

Overcoming Common Psychological Pitfalls

Continual Learning

Record Keeping

Keep a Trading Journal

Periodic Review

Let’s recap