With the right plan you will have the guidance you need to select assets and decide when to take profits and cut your losses. If you fail to plan, you plan to fail. Traders who have been successful over the years will swear by a trading plan so start building yours now.
What is a trading plan?
A trading plan is a decision making tool to help guide your trading activity. You should tailor your plan to suit you depending on your attitude towards risk and how much capital you have available. Things to outline in your personal trading plan:
- Your motivation for trading
- Your trading goals
- Your attitude towards risk
- Your available capital
- Your time availability
- Markets you want to trade
- How to record trades
Do I really need a plan?
A trading plan is a necessity to ensure you stick to certain parameters to optimise profit and keep emotions out of decision making. Although you will need to sit down for an hour or two to make your personal trading plan, you will save time each trade as you have already set up your terms. Creating a trading plan also requires you to focus on your past performance – analysing past trades can help you understand why certain trades were successful and others weren’t so you can go forward with the best strategy for you. Improving your judgement over time and seeing what your particular skills lend to is the best way to improve your success rate in trading.
How to make a trading plan
- Define your motivations
Working out why you trade and how much you can commit to the process will inform you on what markets and what style of trading suits you best. Take a few minutes to write down what you want to achieve from trading and how quickly you want to meet your goals.
- Decide how much time you commit
Most people when they start off trading do it pretty casually. Perhaps you can trade while you do your full time job or maybe you would prefer to trade late at nights or on days off. Help this make a decision on which assets to choose as some will reap better rewards over a long period time (better for those with low time commitments) whereas others are more profitable if entering and exiting within the day. It is also important to note how long you wish to spend on educating yourself and practicing strategies. Being informed is the best way to be a successful trader so don’t be put off by the homework that will lead you to making profits.
- Specify your goals
Use the SMART framework to define measurable and attainable success. Consider how much time you can commit and decide how ambitious you want to be whilst still making your goal achievable. It is also wise to consider what trading style suits you best, refer to our previous article to learn more. There are safer and more risky ways of trading out there which can help determine how achievable your goals are. We recommend using a percentage as part of your target as everyone starts in a different place. An example goal could be: ‘In the next six months I want to increase the value of my entire portfolio by 30%’.
- Decide your risk-reward ratio
Work out how much risk is acceptable to you before you even start trading. Trading on financial markets always carries a risk so you should never invest more than you are comfortable losing. If you’re a beginner you may want to be more careful with your money until you get more familiar with the markets. A typical risk reward ratio is 1:3, meaning you would ideally trade when potential profit is triple the potential loss. Consider implementing stop losses and take profits as this can help make you personal risk-reward achievable.
- Determine your available capital
Be careful in considering how much to invest in your portfolio and remember to never risk more than you can afford to lose. If you need £1000 for rent, bills and other basics for each month make sure you have this in a separate pot to the money you hope to trade with. Investing in stocks and shares can reap higher rewards at a much faster rate than typical investments such as bank accounts, but be aware this comes with greater risk. If you only have £10 each month to add to your portfolio, accept it, you will be thanking yourself in the long run if your trading career doesn’t work out.
- Be honest with how much you know
If you are inexperienced and don’t have much market knowledge then consider learning more. We offer courses and workshops from experienced traders to build your confidence and knowledge base so you can have a successful trading journey. If you know everything about crypto and nothing about other asset classes then consider giving yourself a minor education to get you up to speed before branching out.
- Start a trading diary
A trading diary is for you to record your trades so you can assess what techniques are working for you and what aren’t. Consider entering technical details to see whether you have achieved your risk reward ratio and record any factors that went into your decision to open and close a particular position. Perhaps you saw an article in the news or followed a wall street trader or even felt lucky that particular day – whatever you based your decision on, write it down. You might work out a series of losses are based on the same decision making factor.
Having a trading plan is essential to achieving success. Not only will the process uncover your strengths and weaknesses but it will also help guide your future decisions. If you’re not ready to start investing, practice with BullBear.
11 thoughts on “Trading 101: How to make a trading plan.”