As any other activity, trading needs a plan. You need to create your plan and identify what type of trader you are, which are your weaknesses, so you know where you need the most work done. Successful traders have at least one plan, because they usually implement several plans together. Always write your decisions before executing them. Why? When you see your decisions written, you have the chance to overview and think about them twice. This way you will keep your attention on your decisions and focus on what is a priority. The secret is to write the plan and implement it, do not lose too much time in writing and sleeping over the plan. Write and execute it.
You need a plan because it will help you make a logic trading decision. A good trading plan will help you avoid the emotional decisions in the moment of uncertainty. The benefits are an easier trading process – trade according to your predefined conditions, planning in advance will save lots of troubles, cold-blooded decisions – you know how you should react towards certain market movements, so you won’t include emotions in the decision-making process, a strict trading discipline – trading needs learning day by day, discover why some opportunities bring profits and some not, continuous improvements – you will learn from past mistakes and improve your ability to judge market opportunities.
How to adapt a trading style to your goals?
The moment you decide what type of trader you are, you should start learning about trading online and doing research about trading methods, analysis, assets and strategies. Make learning a priority, and discover what new methods can you adapt to yourself, so you can maximize your profits. This way your plan is more effective when you create it based on your individual needs and expectations. Once you identify your needs, evaluate the efforts required to meet your needs in the timeframe you want. Time, learning and research should be a continuing investment. Research should reflect the latest global trends and financial events. Ask yourself if you want to be focused on fundamentals or technical methods of trading.
Without having a plan, you are planning to fail. How?
• You may not be capable of controlling your emotions when trades go against you.
• You go after any opportunity because you want to make profits out of each of them.
• Always chasing the market and reacting to any small movement (equal to distraction).
• You will hold wrong trades for a longer time, being afraid of big losses.
• You are mainly focused on how to get profits, and you do not consider how to prevent losses.
• You take a longer time to make a decision, because you do not know what to do.
• You lose control and do not set stop loss and take profits once you open the trade.
• You open more trades that you are able to manage, and most of them end up as losses.
Go through these steps to create an effective trading plan
Step 1: Define your favorite analysis
The analytical approach raises the answer, “How do you find out trade tendency?”. It is usually found by a combination of price support and resistance, trend lines, chart patterns, Fibonacci levels, moving averages, Ichimoku Clouds, Elliott Wave Theory, sentiment or the use of fundamentals etc.
This first step helps traders to focus on a handful of scenarios that the trader finds familiar. Even though the trader has a plan, he can look for opportunities to trade depending on trends of assets.
Step 2: Select Your Favourite Trade Setups
The trade set up stands in the center of the trading journey. Let’s first think of the analytical approach as a fundamental step towards trading. For example, viewing a consolidation pattern which can guide the trader to further actions, like going ahead to open more positions, close the current positions or just wait.
Step 3: Focus on a limited range of assets
When starting, it is more effective for traders to limit the numbers of instruments in focus. Markets are not the same and do not have the same behaviour towards an event or a factor which might bring changes in its price. When you are focused in one market you better understand the nuances of it. Traders can even give special attention on specific time frames on a single market to familiarize themselves with what makes this market different from the others.
Step 4: Make clear for how long you will keep positions open
Time frames are related to the type of trader you choose or want to be. So, scalpers or day traders will focus more on short term trades since they open and close their positions on the same day. Swing traders will keep their positions open for a few hours up to a few days. Long term trading involves time frames from days, weeks, months and sometimes years.
Step 5: Be honest how much you can afford to lose
All steps of the plan are important, but there is one, which if missed, is able to destroy the whole plan. Risk management should necessarily be part of the plan and taken in high consideration. Here, traders are encouraged to decide their personal risk tolerance by setting limitations of losses through stop loss mechanisms and taking profits.
Step 6: Define in advance the step after success or failure
It is normal to experience setbacks, so it is crucial for traders to set a few rules so you will be able to manage emotions you would go through. A very smart way to achieve that is by quantifying an amount, or percentage loss that would force the trader to go one step back and evaluate what went wrong. This should be quantified in advance and not let take action in the moment the difficult situation arrives. Now let’s take into consideration a good scenario, what to do when traders are successful. If you are confident, this is a very good sign, but if you are overconfident that could quickly turn winning positions into losing ones.
Step 7: Always stay focused
It’s a smart move to review the trading plan and make changes if necessary. Periodical trade review and journaling are excellent ways to ensure you are following the process outlined in the trading plan. Make a note or save charts relating to successful/unsuccessful trade setups that can be reviewed later on.