The old saying, “If you fail to plan, you’re planning to fail,” may sound glib, but nothing could be further from the truth regarding stock trading. Ask any successful trader, and they’ll probably tell you that you must have a plan and follow it to a T if you want to make money consistently.
A trading plan is an essential piece of your trading toolkit. It serves as your map or compass for trade. However, creating a plan or methodology that works takes time and research. In this post, we’ll guide you through crafting a strategic trading plan. We’ve also included the steps to create a trading plan or you can also look at these trading plan examples to get started.
What is a Trading Plan?
A trading plan is an essential decision-making tool for your trading activity. It’s a written plan detailing your action plan for a given trade.
You create it before your trading activity begins and make your intentions clear regarding what you want to gain from a trade, how to achieve that, and how much capital you have available for that trade. You should also include your entry and exit points and strategies.
A good trading plan allows you to stick to your pre-set parameters with discipline. It helps take emotions and discretion out of your decision-making process. Ultimately, the goal is to improve your chances of making profits from a trade.
Define Your Goals
The first step involves determining financial objectives, time horizons, and risk tolerance. Your goals should be clearly articulated to ensure you can achieve your trading activities. For example, you could say, “I want to increase the value of my portfolio by 10% in the next six months.” This goal is attainable, measures your success, and has a time frame attached to it.
Ideally, start with manageable goals and then increase them as things improve. Keep track of your trades, strengths, and weaknesses.
Select Your Trading Style
You need to identify your trading style. It should reflect your personality, preferences, attitude, and the time you’re willing to commit to trading. Your trading style can include day trading, position trading, swing trading, or long-term investing. You want to ensure your chosen type aligns with your goals and time availability.
Develop a Trading Strategy
Your trading strategies define the ways you plan to make money. A detailed strategy should outline your approach to the financial markets.
For example, you could trade Robinhood stocks with strong momentum behind them. Then you could identify that momentum through positive RNS announcements and technical breakouts. The last step is to trade gaps and find different brokers to increase your shares.
When choosing a trading strategy, consider fundamental analysis, technical indicators, or a combination.
Choose Risk-Reward Ratio
Risk management is one of the most important components of a trading plan. Market prices constantly fluctuate, and even the strongest financial tools carry some risk.
So, consider how much risk you’re ready to take before trading. If losing hurts, then it means you’re trading too large. Most new traders blow their accounts due to taking on more risk to make bigger profits.
Traders prefer a ratio of 1:3 or higher. For example, if you’re risking $150 on a trade and hoping to gain $450, your risk-reward ratio is 1:3. You should risk only a small percentage of your trading capital- say less than 2% on each trade.
Pay Attention to Trading Times
Set aside enough time to watch the markets, but consider what time of day will work best for you. While some traders monitor their trades all day, others set aside time in the morning, afternoon, or late at night.
It’s important to pay attention to peak times of increased activity. Plan to use limits, stops, and alerts to manage your risk.
Decide How Much Capital You’re Going to Set Aside
Determine how much money you can afford to set aside for trading. For example, ‘I will set aside $600 a month for the first six months.”
Generally, you should only risk what you can afford to lose on every trade. Trading is risky, and you could lose all your trading capital.
A strategic trading plan can be a real game-changer. With a plan in place, you’ll be better able to monitor market trends and make calculated moves that circle potential profits. In other words, you’ll have guidance on when to cut losses and take profits.