Why traders need a plan

A plan is not a luxury, a plan is a necessity
Have a plan while shopping, have a detailed plan while trading 

You need a plan because it will help you make a logic trading decision. A good trading plan will help you avoid the emotional decisions in the moment of uncertainty. The benefits are an easier trading process – trade according to your predefined conditions, planning in advance will save lots of troubles, cold-blooded decisions – you know how you should react towards certain market movements, so you won’t include emotions in the decision-making process, a strict trading discipline – trading needs learning day by day, discover why some opportunities bring profits and some not, continuous improvements – you will learn from past mistakes and improve your ability to judge market opportunities.

As any other activity, trading needs a plan. You need to create your plan and identify what type of trader you are, which are your weaknesses, so you know where you need the most work done. Successful traders have at least one plan, because they usually implement several plans together. Always write your decisions before executing them. Why? When you see your decisions written, you have the chance to overview and think about them twice. This way you will keep your attention on your decisions and focus on what is a priority. The secret is to write the plan and implement it, do not lose too much time in writing and sleeping over the plan. Write and execute it.

STEP 2 – Decide if you will be a full time or part time trader
Decide on how much time you will commit to trading. Will you be a full time trader, dedicating all the day long or you will trade as per your convenience. If you want to make long term investments, and wait until the market gets matured, use stop loss orders to manage your risk, you will not need long hours in front of your computer, you will only need to be there in the moments you want to take actions. It is important for you to spend time preparing yourself on how to trade, which includes studying, practising, analysing and having a good strategy.”

STEP 3 – Define what you want to achieve
Your trading goal should not be just written as a statement. It needs to be specific, measurable, relevant and logically achievable. A smart goal would be written like this ‘I want to increase the value of my portfolio by 20% in the next 12 months’. This is a well-written goal because it is specific, measurable, relevant, it is time-framed and it has a certain value which is proven by statistics that can be achieved in 12 months.

STEP 4 – Choose a risk-reward ratio
Once you decide on the time you want to spend trading, decide also on how much risk you are ready to take on. Deciding your risk limit is very important, because trading financial markets carry some degree of risk even when you trade the safest financial instruments. There are some traders who want to start small and test the waters first, while other traders take a bigger step and start trading with large amounts of capital, taking more risks in hopes of larger profits. It is up to you, which trader you chose to be. It happens that you might go through more losing positions than winning ones, still you might be profitable. It is all down to risk-reward ratio. How can you read the risk-reward ratio? Well, if you’re risking $250 on a trade and the potential gain is $1000, the risk-reward ratio is 1:4.

STEP 5 – Decide on the amount of capital available to trade

Decide on the budget you can afford to trade. You should not risk more than you can afford. Trading on financial markets involves high levels of risks, and without putting some limits since the beginning on how much you are willing to put on trading, you are exposed to the ‘losing all’ possibility. Do the maths and be sure you can afford the potential loss on every trade you have opened. 

STEP 6 – Expand your financial market knowledge
Your trading plan will be affected by the category of the asset you chose to trade. So, a plan created for forex trading will be different from a plan created for stocks trading. First, be honest with yourself and evaluate the level of knowledge you have on the certain area of the market. Keep in mind that there is always a room left for improvements. Consider everything you know about the assets, financial analysis, price movements, the time when markets open and close and every other factor which might influence your trading. As many factors you consider, better you know the market, better decision you will make, higher are the chances to maximize your profits and minimize the risks. 

STEP 7 – Keep a trading diary
Keeping track of your trading activity will help you remember what you did wrong and do not repeat it. Past mistakes should not be repeated in the present. Use your diary to document your trades as this will help you know the moment you should not take actions. Put there technical details like entry and exit points, market conditions which influenced such a decision, and your emotions, how you felt when you made a decision, how you reacted when it was a successful decision and how you felt when you failed. More details, better. 

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