Why do you need a Trading Plan
Today’s article will explain why you need a trading plan. It will show you how to build your own. So, let’s get started. A trading plan is like a business plan. It is a check list that helps you to trade in a consistent way. It is a template for trading the markets.
The check list will describe of how to set up, roll and close a trade in a logical way. It tells you step by step what you need to do. The Trading Plan will be your objective guide to trading the markets.
In essence, a trading plan will state your goals as a trader and will provide you with a clear check list of how to achieve them.
Why Build your own Trading Plan
Benjamin Franklin said: “If you fail to plan, you are planning to fail!” The reason why you need a Trading Plan is that you want to know how to trade in a consistent way. You do not want the trade based on emotion. If helps to to know exactly what to do in every market condition. For a lot of people trading can be a very tens profession. If you do not follow an objectively designed trading plan that describes all of your steps, you might be led by your emotions. You may become an emotional trader, also known as an entrepreneur who loses money.
Your greatest benefit of a Trading Plan could be that it helps you to use the best strategies in every market condition. and when the market turns against you you know exactly how to adjust. This will certainly reduce the number of losing trades you encounter which will improve your overall winning percentage. Many traders end up ‘running and gunning’ in the markets instead of learning to trade stock options. The reason they act like this is because they didn’t take the time to create their own effective trading plan.
Components of a Trading Plan
The Trading Plan can be used for people who like to trade stocks and for people who want to trade stock options and like to sell option premium. Below you find a list with the necessary components of a Trading plan:
1. Know yourself as a trader: It makes a lot of difference if you trade for fun or if you want to live the life from as a prof. What is the reason you want to trade? Complete this sentence: ‘I want to be a successful trader because…
2.Define and understand your trading goals: Setting your trading goals is one of the most important steps in developing a trading plan. It is also the step that most people neglect.
3. Decide what types of trading you are interested in. Which strategies do you use with regarding of the market conditions and your assumptions of what the stock might do.
4. Identify your markets: It is important to develop a feeling of the stocks you like, to know what other stocks in the same sector are doing, bonds and metals. Create a watch list of stock from companies you like. This will help you to determine to understand the stock options you want to trade.
5. Establish your A trading system will apply a series of rules to make trading into an almost automatic process. You’ll need to decide whether you would prefer your trading to be mechanical, where you pick a trading system and let it guide all your trading decisions. If you decide to use a trading system, it should include: set-ups, adjustments, taking profit and closing trades.
6. Know your portfolio: How is the balance of your portfolio. When you place a new trade what will be the effect on your portfolio balance.
7. Know what you are willing to risk : From a trading plan perspective, it is important that you consider your money and risk management rules, establish them, and stick to them through good and bad trading times.
8. Decide how you want to manage your open trades. This aspect of the trading plan deals with your handling of your open positions. This is when you can be most subject to emotional responses – you see the market drop, and you want to cut your losses, or the market spikes and you feel tempted to hold your position even longer.
When you tested and you have a defined risk trade might considering doing nothing. If you have an undefined trade you will roll the untested side.
When you have sold options to collect options premium you might close the trade when the trade has reached between 25-50% of maximum profit.
I trust you now have a better understanding of how to build your own Trading Plan. You have know an idea how it can be structured and what types of components it should contain. I just want to reinforce that creating and using your trading plan will help you to achieve your goals much quicker than if you don’t write one. A trading plan will help you to get more profit when you trade stocks or sell option premium.
Once you wrote your trading plan you must ensure that you use and follow it. This will establish positive trading habits like patience and discipline, and it is these habits that will make you money over the long-term.
If you want to see my trading plan read the article A Trading plan for Consistent Profits