Creating a trading plan is the first step to become a successful trader in financial markets. Most novice traders don’t realize how important trading plans are until they crash their trading accounts several times. But why? Because they don’t like to follow rules. Trading plan is also a set of instructions and rules, which must be followed unconditionally. Therefore, newcomers usually don’t want to have a trading plan.
What is a trading plan?
A trading plan is a list of instructions which organizes trading with the final purpose of gaining profit. This plan shall be comprehensive and shall not leave any unclear spots. Trading plan shall specify when to enter a position and when to close it. What shall be done before entering a position and what shall be done after closing it. Although it may seem a difficult task, creating such plan is easier rather than sticking to it while trading.
Briefing the trading plan is also crucial. A trading plan which takes 15 minutes to read completely is probably useless. Trading plan shall be brief and easy to review. After creating the plan, it shall be put to test and modified if necessary.
Why having a trading plan is crucial?
Trading plans help you trade organized in forex. Trading professionally is like a business and shall be treated like one too. Here is where you can distinguish between trading and gambling. All businesses have a defined framework, which allows only a precise and efficient implementation. Financial markets, specially forex and stocks market don’t strictly oblige investors to act in a certain framework. Each trader who has the money, can take part in these markets. This means that no one controls the fear and emotions of traders. This is the trader that must control his/her emotions him/herself by making some rules.
In addition, trading plan can show us what techniques are effective in every market. We are after gaining profit whether we trade in stocks, forex or cryptocurrency markets. To be successful, we shall have a clear plan. Trading plan can easily show us what to do and what not to do, and also limits our losses.
Define your trading strategy
Each trading plan begins with the precise definition of the trading strategy. There are several trading strategies that you can find out about in the internet. Let’s say you have chosen to trade with the Pin Bar strategy. If you use the Pin Bar strategy, you must determine whether you use it in trends or in reversals. What conditions shall be satisfied? For example, should the Pin Bar pattern form on a resistance or support to make a trading opportunity? You shall precisely describe the strategy you have in mind, in a way which it could be backtested and adopted in case of being successful.
Specify your timeframe
Trading in all timeframes isn’t possible. You must specify on what timeframes you intend to trade. If you stick to several timeframes, your job would be a lot easier. Most novice traders have problems specifying a timeframe, therefore they tend to change their timeframe of choice constantly. One week with the hourly timeframe and the next with 1-minute.
Since traders have no idea what timeframe to choose, they enter the trade and then change their timeframe. Constantly changing the timeframe would eventually lead to confusion. Try to choose one or two timeframes and trade based on them. After finding the suitable timeframes, you should write it down in your trading plan. It’s always a good practice to analyze on longer timeframes and move to shorter timeframes when opening or closing the position.
Prepare your watch list
As a professional trader, whether you trade in stocks or forex market, you shall have your own list of shares or pairs to analyze everyday. If you trade in forex, you shall list the currency pairs which you wish to trade. You can’t trade one currency pair randomly each day. If you trade based on technical analysis, try not to choose more than 10 currency pairs. But if you trade based on fundamental analysis, you should choose even fewer pairs. Usually choosing 10 currency pairs allows you to analyze and generate signals properly for each pair.
Prepare your mind
There is no need to meditate, you just need to prepare yourself for trading. We all have our bad days, getting annoyed with every little detail, feeling a lot of stress. You may have experienced stressful nights, without any apparent reason. You have to train yourself to have control over your mindset. In this case you can easily reach an acceptable level of control and even begin meditating to prepare yourself for trading. There is always time for trading, so don’t rush into anything and try to proceed calmly.
Define risk/reward ratio
The risk/reward ratio defines the location of stop loss and take profit. This means that how much is the potential reward of a certain trade compared to its potential loss. This number is a good indicator of a trading opportunity’s quality. The potential reward of a trade should always be larger than the loss. For example, of the risk/reward ratio is 1:2, this means that the potential profit of the trade is 2 times larger than the loss. Sometimes the risk/reward ratio is shown with the letter “R”. For example R3 means a 1:3 risk/reward ratio.
Define entry rules
How would you use the trading strategy you defined earlier, in entering positions? For example, if one of your strategies is the Pin Bar strategy, what methods do you use to implement this strategy? Would you wait for the candle to close after the Pin Bar? Or do you enter a position from 50% of the Pin Bar? You shall describe your exact approach and define the exact patterns that you take as entry signals when they appear on the price chart.
Define exit rules
This is one of the common mistakes that most novice traders make. They spend so much time on finding the suitable entry point, they forget the fact that they must close their position eventually. This is while everybody claims to be the master of take profits. Because everybody knows how much they will gain from a position. But until no rules and conditions are set for position closure, the position will remain open until it reaches the stop loss or take profit levels. You shall monitor your open positions closely, so you can lead them in a correct direction.
The bottom line
If you intend to enter financial markets and become a successful trader, creating a trading plan is probably the first thing you should do. A clear plan which can be easily stuck to, will lead your trading career in a way which you can make informative decisions away from emotions. Always brief your plan and review it constantly so you don’t leave any details out when trading.
Aron Groups Broker facilitates trading by offering MetaTrader5. This trading platform includes several technical analysis tools, drawing tools, research tools and also offers numerous pending orders, which allows traders to plan their entry and exit according to their risk management criteria.
Written by: Mohsen Mohseni (Aron Groups).