*OspreyFX would like to state that traders should research extensively before following any information given hereby. Please read our Risk Disclosure for more information.
What is a trading plan and why you need it
- How to proceed efficiently – Create a plan in 7 steps
- The takeaways and long-term benefits
- Click here to jump back to the importance of having a trading plan
There is nothing better than being over-prepared and ready to tackle anything that comes at you. In trading, like in war, the best defense is a good offense.
If you are serious about your business and everyone who is, is in it for the win, you must have a plan. The ability to track and optimize your performance as you go along is crucial.
A trading plan provides a framework to guide you through the trading process. From setting the conditions under which a trader enters a trade to identifying markets, exit trades, and most importantly managing risks along the way.
Create a plan that resembles you – in 7 easy steps
1. Choose your approach
This initial step of the trading plan helps traders to narrow their focus on a handful of scenarios that the trader is comfortable with. Thereafter, traders can look for opportunities to trade based on preferred trade setups.
2. Select your setups
Setups are based on several factors that collectively lead to higher probability trades. If you are new to forex trading, this process may take some time to figure out but traders need to find a trade set up that works best for them.
3. Limit your markets
When starting, traders need to limit the number of markets in focus. Traders can even focus on specific time frames on a single market to familiarize themselves with their characteristics and movements.
4. Think about your holding period
Time frames will depend on the type of trader. Traders that focus on short term trades (trades opened and closed on the same day) include scalpers and day traders. Medium-term traders usually hold trades for a few hours up to a few days and are referred to as swing traders. Long term trading involves time frames ranging from several days, weeks, months and in some cases, years.
5. Know your risk tolerance
Each step in the trading plan is important, however, if risk management is missing, the whole plan will fall apart. In this step, traders will need to discover their risk tolerance which corresponds with how far a trader is willing to set stop losses when limiting downside risk.
6. Plan how you handle adversity
All traders will eventually experience the dreaded drawdown, so traders need to set a few rules to follow once this happens to manage emotions.
7. Have a routine to stay on track
Traders should set aside time to reflect on the week’s events and analyze individual trades. It’s a good idea to regularly review the trading plan and make tweaks if necessary. The purpose of a trading plan is to give you a strong foundation and boundaries to operate within.
In short words
- Set goals.
- Focus on risk.
- Be sure to do your research.
- Plan your entry and exit.
- What is your stop loss–when will you pull out if things aren’t going your way?
- Write it down.
- Review and optimize.
Takeaways
- Having a solid trading plan helps you engage with the markets in a more efficient and safer way.
- A trading plan should be written in stone but can be optimized and adapted to changing conditions.
- A solid trading plan considers the trader’s style and goals.
- Knowing when to exit a trade is just as important as knowing when to enter the position.
- Stop-loss prices and profit targets should be added to the trading plan to identify specific exit points for each trade
Long-term benefits of trading plans
Trading plans can upgrade your trading journey. You move away from pursuing shiny stocks to going after profits through calculated moves. Your trading style becomes more consistent and gives you more confidence.
*OspreyFX would like to state that traders should research extensively before following any information given hereby. Please read our Risk Disclosure for more information.