trading is a type of business. Like any business, it requires having a well-established business plan. Otherwise, it will be very hard to succeed. Most beginners think that a plan involves reading a few books on trading, learning how to read baseline charts, and opening a brokerage account. Well, it seems like not enough for successful and risk-free trading.
Today, we will discuss major steps that will help you work out and develop a clear and effective trading plan. It can be changed and customized in the long run, as you might want to improve your trading strategy. However, your business plan must have a solid background with essential parameters to include.
Each plan is unique. You will never find two similar plans, as every trade utilizes his or her unique techniques. Every approach reflects your particular trading style and personality. Besides, it contains specific risk tolerance and management approaches that are also different. Despite those tools, a solid trading plan must contain the following.
Think you are good enough to enter the market with real cash? Make sure you have enough skills and understanding of how the underlying market works. This is where paper trading or demo accounts may come in handy. These tools offer risk-free ways to work out a winning strategy without depositing real cash.
Beginners have a chance to prevent crucial mistakes. At the same time, paper trading may grow into self-confidence. So, it is very important to stick to the plan and do not exceed the trading budget even if you are expecting a huge return. Costly mistakes usually happen when everything seems to run smoothly.
Apart from skill assessment, traders must be well-prepared mentally. Having a good sleep will make you feel right. Emotional and psychological stability are vital in the epic financial battle for the profit. Anger, anxiety, fear, and greed are the feelings you must avoid whatever it takes.
The next important stage is to set the affordable risk level. How much of your capital or portfolio can you risk on a single order? Of course, the risk level will mainly depend on the approach and trading style. However, the amount of risk should never exceed 5% on a one trade. As a rule, it ranges between 1% and 5% depending on the asset type, market, and other factors.
Once the risk level has been set, it is time to identify the main investment objectives. This is where you will need to set a realistic risk-reward ratio with the minimum and maximum levels you are ready to accept. A good idea is to develop a daily, weekly, and monthly schedule with clear profit targets you plan to reach.
A successful business plan requires a lot of research and exploration. You need to always be aware of what is going on in the world before the market opens. Some instruments can be traded both at pre- and after-hours trading. Use specific technical indicators and fundamental analysis to know the situation with a targeted company or asset.
Every trade must be well-prepared. This is where you may configure specific alerts that will generate market entry or exit signals. At this stage, you need to create signals that are easy to detect avoiding the market noise.
The majority of beginner traders do the same mistake and do not include this stage in their trading plan. Most newbies are concentrated or identifying buy signals forgetting points to exit the market. So, the idea is to always know your exit before entering a trade. Exit the market even if you lose. You will also have to learn how to deal with failures and leave the trade even if you are down. What’s more, don’t forget to set profit targets for every single trade.
While exits are more important than entries, it is still very important to know how to identify the best market entry point. Avoid too complex systems. Having 20+ conditions and triggers can make it hard to manage the strategy. A good idea is to use trading bots. They can take into account thousands of parameters and conditions making it simpler for investors to execute trades on the go.
Keeping records is very important. Even the most experienced and successful traders still take notes. They write down every trade they win or lose with all major insights and factors that led to a particular outcome. Records help you analyze if the strategy is running smoothly or requires modification. The approach will let you avoid the same mistakes in the long-run and improve the overall trading approach.
Knowing why and how you get profit is more important than the profit itself. The same refers to a loss. You need to clearly understand the reasons for the outcome of every single trade. Do not be afraid of losing days. They are natural. The most important thing here is to stick to the plan whatever happens and keep emotions aside.
You will never find two similar trading plans. They depend on a specific approach and trading style. At the same time, a plan contains several baseline points and tools that will let you improve your trading and build a solid career. Of course, it will not guarantee success when trading with real cash. However, it will let beginners avoid costly mistakes right from the start.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.