First things first, we need to create a trading plan. As the old saying goes, “fail to prepare, prepare to fail.”
If we just hit the markets any time we like without giving much thought to what our plan is and why we are doing what we are doing, then you can guarantee that you will be recording losses before you know it.
Granted, you may get lucky for the first few times, but eventually, that luck will run out, and the lack of planning and a clear strategy will undoubtedly show.
A trading plan, not a trading strategy
When we say trading plan we don’t mean that you need a clear idea of where you will enter and exit a trade, instead we mean you need to have an overall sense of what your goals and ambitions are for trading and what sort of funds and time you can allocate towards these goals.
The trading plan should be personal to you, honest, and realistic. This is what is going to help you decide, what, when, and how much you want to trade.
This should be the foundation of your trading and should be referred back to when you feel yourself getting into a rut, or even to stop yourself getting carried away when you’re on a winning streak.
A solid trading plan should help you to keep a logical trading mind and keep your emotions in check by helping you to make more objective decisions and fostering a trading discipline which is so vital to becoming a profitable trader.
How to make a trading plan
Here is a template to follow when making your plan, be sure to include all of these elements and anything else you feel is important.
1. Write down your main motivation for wanting to trade
As with anything in life, it never hurts to stop and take stock of what we are doing and why it is we are doing it.
Why do you want to start trading? Do you want to become a full-time trader, add a little extra income to your full-time job, or do you want to become a fully-fledged expert, and find a job on Wall Street?
Whatever it is, write it down and keep this in mind when you are trading. It helps to keep things in perspective later down the line.
2. How much time can you commit to your new trading career?
How much time are you willing to commit to this new hobby/career? Are you a stay at home parent who can commit 40 hours per week or do you run five jobs and have only a few hours spare? Can you trade during work hours, or not?
If you only have a limited amount of time you need to plan efficiently and make sure you are fully concentrated when doing so. Set aside some dedicated trading time and stick to it, no more, no less.
3. Clearly outline your goals and what you want to achieve
Similar to the first point, but this time you should write down exactly what you want. Use numbers!
For example, “I want to increase my trading balance by 20% within the first 12 months”. That way you can hold yourself accountable and refer back to your goal when you need to.
4. How much capital can you raise for trading?
This is important. Never risk what you cannot afford to lose. Seriously.
This gets said a lot but it is one of the most important factors in trading. If you are overinvested that you will not be trading efficiency, it is simply impossible.
Losses will be harder to take and you will likely be trading with scared money which could lead you to setting stop-losses too tight and taking profits too soon. Keep it realistic.
5. Risk tolerance
We will go into this in more detail later on in the unit, but for now, right down how much you are willing to lose on one trade. The smaller the better of course. Somewhere around 1-2% per trade is reasonable.
It also makes sense to have a daily loss limit. If you lose 2% of your trading balance then call off the trading for the day. If you don’t you will likely chase your losses and trade poorly.
6. Pick a currency pair and a time frame
Don’t be the jack of all trades and the master of none!
It can be very overwhelming to have 30 markets up on your screen with indicators all over the place.
Save yourself the stress and stick to one currency pair and one time frame. That way you can quickly learn how that market behaves and how you can best exploit it.
When you get more comfortable you can branch out when you are ready.
7. Create a trading diary
Last but most certainly not least, create a trading diary. Keep track of everything. There are alot of great tools that you can use online to help you keep account of your trades.
Some of the most important things to write down are the reasons for entering a trade (hopefully there is more than one), how the trade performed, and a post-trade analysis.
By doing this we keep ourselves accountable for every trade and it highly reduces the risk of erratic and sub-optimal trading.
Be sure to go over your diary regularly. This will help you to highlight any weak points that you need to improve on.