9 Essential Steps to Building a Trading Plan

When it comes to trading, it is essential to remember that if you don’t have a proper plan, you are going to fail. It is true that having a plan doesn’t give you an absolute guarantee of success. But, the fact is that a plan gives you direction and if you do incur losses, you can know where you went wrong and make changes accordingly. Documenting allows you to identify what works and how to avoid making the same costly mistakes over and over again. Remember that going through some books, purchasing in a charting program and signing up with a broker doesn’t constitute as a plan.

Yes, these steps are positive ones, but they will not help you in writing an overall plan for your trading. This doesn’t need to be written in stone because a good plan should be able to adapt itself to the ever-changing market. In addition, every trading plan is a reflection of a trader’s style and goals. Thus, you cannot use someone else’s plan as yours. But, how do you build a plan then?

Here are some essential steps that can help you:

Skill assessment

Are you ready to start trading? Have you put your system to the test? Are you confident it will work? Can you follow trading signals? Remember that trading is a give and take battle. The real professionals are those who are prepared to take profits from those who make the mistake of trading in the market without an actual plan.

Mindset

How are you feeling? Have you had a good night’s sleep? Are you ready to face the challenge ahead? If you are not psychologically and emotionally ready to participate in the market, it is better for you to take a day off or else you will lose your money. This is bound to happen if you are preoccupied, distracted or even angry. Create a market mantra that will help you in developing the right mindset and put you in the trading zone. Furthermore, make sure there are no distractions in the trading area.

Establish a risk level

How much of your capital should you risk in a single trade? This will depend on the trader’s risk tolerance and trading style. It can be anywhere between 1% and 5% of your total investment, depending on what you are comfortable with. This means that if you lose that much on a given trading day, you will get out and come back fresh the next day. It is better to invest small so you can fight another day instead of just going down permanently.

Set some goals

Before you start a trade, it is also better to have some realistic risk and reward ratios or profit targets. What is the minimum return or loss you will and can accept? A number of traders don’t accept a trade unless the profit potential is three times more than the risk. You can set daily, weekly, monthly and annual profit goals and adjust them regularly as per the changes in the market.

Always do your homework

It is always a good idea to know what is happening in markets all around the world. Keep up with any major news and events that will have an impact on your trade. Knowing the latest news will also be useful in gauging the market mood before you start trading. If there are any important events occurring, you need to decide if you want to trade before or after. It is better to not take a gambling approach and make a decision based on probabilities.

Be prepared for trading

The choice of a trading system, broker and program are of the utmost importance. You need to make this decision wisely if you are really prepared for trading. For instance, check this GigaFX review to see if the broker offers the platform and services you want during trading. Likewise, you also need to check the customer support you will get and if trading signals and indicators will be offered to you.

Have some exit rules

The biggest problem with trading is that those who don’t have a plan will focus mostly on buy signals 90% of the time and not on when to exit a trade. A number of traders don’t sell when they are down because they don’t want to suffer a loss. You have to get over this fact if you want to trade successfully. Stop losses should be used and if it gets hit, it means you made a mistake and you shouldn’t take it personally. In the long run, this will allow you to make more profits.

Have some entry rules

This comes after exit because entries are not as important as the former. The entry system can vary for every trader because it depends on their interests and preferences. You can make it as complicated as you want, as long as it is effective, but make sure that snap decisions can still be made. You can also use a program for this purpose if you are unable to make up your mind. It is best to stay subjective if you want to choose wisely.

Do a post-mortem

Lastly, conduct a post-mortem of the trading plan you have developed by following the above-mentioned steps. The total profits and losses are secondary to knowing why and how they happened. You should note down your conclusions so they can be used as a reference later on. Keeping records can help you in the long run when it comes to making decisions about trading. You will also be able to identify the weaknesses in your plan and fix them to get higher returns.

As long as you follow the steps outlined above, you will be able to come up with a winning trading plan that will help you in navigating the market of your choice with ease. You will not crash and burn and will be able to survive in this challenging world.