Whether you’re trading forex, crypto or any other market, having a trading plan is essential if you want to be successful; as the saying goes, if you fail to plan, then plan to fail. A trading plan acts as a framework to help guide you throughout the entire trading process, from identifying the right markets, to exiting a trade. However, your plan needs to be thoroughly researched, tested and carefully thought out in order to work properly and guide you through the markets.
Research from the University of California and Peking University has found that 75% of day traders quit within two years, so if you want to make it as a trader, having a strong trading plan is the first step towards success. By taking the time to form a plan, which you can adapt along the way as you experience more trades, you will see several benefits as well as an improvement in your trading skills.
Why do you need a trading plan?
Developing a trading plan takes time and effort, but doing so has a number of advantages. These include:
- Making trading easier – although you should be doing regular research into your chosen market, having a plan makes it easier to stick to your pre-agreed limits.
- Keeping track of your performance – by keeping a record of your trades, you can learn from previous mistakes and improve your skills and judgement for the future.
- Better discipline – having a plan will help you manage risk better, which will help you manage both your capital and your emotional state, as you will be able to identify how and why any errors might have happened.
No two trading plans are alike – each trader will have different limits and strategies they prefer to use, in line with their personal trading styles. With this in mind, here’s some advice on how to create your own solid trading plan.
How to create a trading plan
By following these guidelines, you will be able to form a trading plan that works best for you:
Evaluate your skills and goals
Whether you’re completely new to trading or already have some experience under your belt, you need to consider your skill and experience level when it comes to formulating your trading plan. This will help you decide whether you’re willing and able to handle factors such as greater risk margins and what markets you might want to trade in, and should form the base of your trading plan.
You should also consider what goals you are trying to achieve with your trading. For example, if you want to have a steady income of £300 a month in a year’s time, you need to think about what strategies are best and how you will manage losses, particularly within the first couple of months. You also need to think about other factors such as how much time in a week you are able to commit to trading, and how it will fit around other areas of your life. If you rush this stage, you will have less of an understanding of your motivations, which means less control of your psychology and ultimately a reduced chance of success.
Do your research
Do your homework before entering the market. Take the time to read the news and see if any international events have occurred that will have an impact upon your planned trades. Similarly, keep a note of any economic reports that will be issued soon, as these can cause volatility in the market before they are released. By keeping an ear to the ground and planning ahead, you can minimise the chances of any major events, planned or not, from disrupting your plan.
You should also decide what strategies you are going to use in advance. These will depend on your personality, your attitude to risk and your level of time commitment, so focus on what works best for you instead of what other traders are doing. Of course, you can adapt these along the way, but following a certain strategy will help you keep control of your trades and help you identify patterns that may be helping or harming them. Check out our blog post about trading strategies here for more advice on the subject.
Test, test, test
Before you use your plan for real-world trades, you need to make sure it’s fit for purpose. Even if you’ve done hours of research, if you immediately put it into practise without testing it first, you are putting your investments at unnecessary risk. Testing your trading plan not only provides you with an idea of how successful it might be, but can help you build your confidence before you execute any actual trades.
Once you’ve done the necessary back testing against historical market information and feel confident that your plan can work, you should still keep your first trades small. It’s better to have a couple of smaller profits instead of one major loss, and by starting with less risky trades, you might be less profitable but you are also less likely to be knocked down by any losses. This also gives you a chance to make sure your plan actually works in the real world and make any necessary adjustments before entering bigger, riskier trades.
Keep a written record
You wouldn’t go grocery shopping without making a list of what you need, and the same logic applies to trading. If you don’t have your plan written down, you will be more inclined to make spur-of-the-moment decisions that are driven by emotion instead of the carefully thought-out logic of your trading plan, which can contribute to unsuccessful trades and lost profits.
The best traders keep records of their trades, so they can keep track of how and why they were able to win, or what might have contributed to a loss. Be as detailed as possible so you can easily refer back to your notes in the future, with details such as the length of the trade, support and resistance levels, and any other important factors. Analysis is important to learning and developing your trading skills, and this will help you keep track of whether your plan is actually working or not.
Plan ahead for discipline
It’s easy to tell yourself you will stick to your trading plan no matter what, but once you’re in the markets and dealing with the emotions of winning or losing trades, you might be tempted to stray away from it. If you can feel your emotions taking control, take a step back to calm down before trading again, and make a note of what happened to excite or upset you.
To be a successful trader means making completely objective decisions that aren’t swayed by emotional impulses. It might take some time, but with practise and self-awareness, you can develop the discipline to stay focused on your trading plan. Make some time for reflection at the end of the week to analyze your trades, see if you need to tweak your plan, and make notes about your emotions from the week to see how you can manage them better. Developing a level of self-awareness and emotional intelligence will be hugely beneficial to your trading, so this should be an essential part of your week.
No matter how strong you think your plan is, or how well you may be able to forecast the markets, there will always be unexpected events that can disrupt things. Natural disasters and political events can have an almost immediate impact upon the markets, so make sure you have a back-up plan prepared, even if that means something like ending a day’s trading early. The main priority is to protect your investments.
While you should be confident in your trading plan, stubbornness will only serve to damage you in the long run. If something isn’t working, take a moment to evaluate if this is because of external factors, or if you need to change something in your plan. Don’t be afraid to experiment with different strategies, within reason, and you will see a growth in your confidence and hopefully your number of successful trades sooner than you might expect.
By following the tips in this blog, you should be able to form a strong trading plan that will not only improve your chances of success, but help you learn and grow as a trader. A trading plan will give you a strong foundation to build off, and by setting boundaries, controlling your emotions and documenting your progress, you will certainly see an improvement in your trading.