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9 Steps to Building an Effective Trading Plan

9 Steps to Building an Effective Trading Plan

When it comes to trading, the common saying “failing to plan is planning to fail” applies. Planning your trade helps you stay focused on your trading objectives, maintain discipline, and refine your trading approach overtime. Whether you have a plan already or are considering making one, here are some useful ideas to help with the process.

Assess Your Skills 

Ask yourself: are you ready to trade? Have you test-run your system by trading on a demo account and are you confident that it works? Can you follow real-time market trends like volume surges or stop loss levels without hesitation? Can you adjust your trading strategy to changing market conditions when it is necessary? Can you properly study historical charts and do backtesting? These questions will help you determine whether you are ready to start trading or not.  

Be Mentally Prepared

Are you feeling up to the challenge ahead? This may seem trivial, but it’s necessary to consider if you are emotionally and psychologically prepared to try your hand at trading. This is important because if you’re distracted while trading you could lose a lot of money. Bear in mind that trading is not different from any other serious business. Being single-minded about the task is crucial. 

Determine Your Risk Level

It is essential to set a risk level you’re comfortable with. This is because entering the market blindly is a recipe for losing your savings. How much of your portfolio are you willing to risk on each trade? The answer to this question depends on your trading style and how much risk you can handle. 

It can be anything from 1% to 10% on a given trading today.This means if you lose that much at any given point during the day, you get out and try again the following day. Remember, being able to stick to your pre-determined risk level requires discipline.

Set Your Goals

Whether you want to enter the market to trade commodities, currency, cryptocurrency, stocks, etc., setting realistic goals and targets will save you a lot of money and heartbreak. The first step is to determine the risk/reward ratio you will work with. 

For example, you may decide that you will not place a currency trade unless its potential profit is at least four times greater than the risk. Set goals foreach week, fortnight, or monthand review them regularly as you gain more trading experience.

Do Some Homework

Before you enter the markets or before they open, find out what’s happening around the world. Check if overseas markets are falling or rising. Check pre-market activity for index futures – these are good indicators of market sentiment. Check economic data and news. It’s better to trade after major news has broken because you cannot pre-determine if prices will fall or shoot up after the release.

Prepare for the Actual Trades

Whatever security you are trading and whichever system you’re using, make sure to indicate both major and minor support and resistance levels. Also, activate signals for entry and exit. Make sure all alerts are clear and unmissable – whether visual or auditory.

Have Exit Rules in Place

A successful trading plan indicates when and at what point to exit. Every trade has at least two exits. These are Stop Loss and Take Profit. Before entering a trade, note down your stop loss level. Similarly, once you reach your desired profit target, place the trade. Do not hesitate – waiting for prices to increase because they can change at any moment. Again, this requires discipline.

Keep Records

Any good trader is good at keeping records. This applies to both wins and losses. If it is a win, you want to know what moves led to that. Even more important is knowing why you lost, so you don’t repeat the same mistake in the future. Your records should include targets, entry and exit points of each trade, what time it was, support and resistance levels, etc. Make sure to indicate why you made particular market moves and any lessons you learned.  

Perform a Post-trade Analysis

At the end of the trading day, add up your wins and losses. Also, reflect on both results and see what you can do differently next time. Note down your reflections on your trading journalfor future reference.  

Remember, you should regularly reevaluate your trading plan according to market conditions and your growing skills. Also, your plan should reflect your style as well as trading goals.

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