To be successful in most endeavors, you need a plan and trading is no exception. Extensive market knowledge and years of trading experience will help you to make a choice but only your trading plan will make you successful. Irrespective of whether you are trading in stocks or forex, trading with a plan and without one can make all the difference between making and losing money.
Defining a trading plan
A trading plan can be defined as a planned method to execute a trading system. Your trading plan is very personalized – you have only developed it based on your analysis of the market and outlook while factoring in risk management and personal psychology.
Importance of a trading plan
Your trading plan is important because it helps you to –
- Define your objective or goal
- Make you disciplined as a trader
- Improve your trade
- Stay focused on your objective
- Minimize your loss and maximize profit
Building a plan
- Understand your trading psychology –
Be completely honest with yourself about –
- Why do I want to trade?
- What is my motivation?
- What are my strengths and weaknesses?
Your trading will depend solely on your mental frame or trading psychology. This is a key factor that provides the framework of your trading plan. To understand it fully you have to factor in your emotions, biases, and prejudices along with your personality traits.
- Invest in research –
Following the news on everything that will affect business and money leads to fundamental analysis. Any decisions based on this analysis will be subjective.
If you are relying more on calculations and probability then you are leaning on technical analysis. This kind of analysis can best be an indicator that might give an idea about market directions.
Whichever style of analysis you adopt, be aware that this is not a one-time engagement but a continues up-gradation.
- Understand risk management –
Money is needed to make money! But how much do you require? Be honest with how much money you really can spare and how much risk are you going to take. Any miscalculation can turn to be very costly.
The good news is that if you are trading in Forex then you can start by investing a small sum or no sum at all. A free demo account is a good idea because it will help you understand the market at the same time. If you are patient enough, you can also save up a good amount for seriously investing.
- Know your market-
While trading in forex, it is extremely important to know which currency pairs to trade on as the exchange rates vary. It is also extremely important to know the timeframe of your trade. Are you planning multiple trades a day or invest in more long term holding?
- Manage time –
Whether you are planning to trade in the stock market or forex, time is important. Trading cannot be part-time or an off and on work but requires patient scrutiny of the market or exchange rates. Forex rates change in small increments known as pips and you should be there to take advantage of a minute fluctuation or change.
Putting the plan in practice
Here are some points to plan the actual trade and stay on track while you are at it –
- Prepare a checklist according to your plan and use it.
- Documentation is crucial to success. Note down all the details and all the steps that went into a trade. Include your emotion after the outcome. Compare them later with other trades and soon you will understand what you did right to make a particular trade successful.
- Be consistent with your methods to understand their efficacy.
- Weigh your success on how much you are going to lose as opposed to how much you can win.
- Never get into a trade without determining when you’re going to get out.
- Don’t get emotional with the trade outcome. Getting ecstatic over a good trade is just as bad as crying over a bad one.
- Be open to modifying and changing your strategy if it doesn’t work.
Your trading plan is useless if you don’t put it into practice. You need to be patient. Trading is forex is rewarding but it won’t make you rich overnight especially without a trading plan.