how to create a winning trading plan. In today’s day and age, we are no strangers to financial trading. Financial markets are abundant, and anyone with a keen interest and some capital to spare can participate in trading stocks, forex, crypto, commodities, and more.
But what is less talked about is that the majority of traders do not end up making a profit and many end up incurring substantial losses, eventually causing them to quit the activity altogether with a hole in their pocket.
If you look a little more closely at the trading habits and strategies of experienced and successful traders, you will find that many of them have almost nothing in common.
Some find success in stock trading, while others prefer to invest in forex and commodities. Some scalp and trade short-term, while others prefer to hold their positions open for weeks and months.
Observing the habits of the most successful traders, you probably can’t help but wonder: what exactly are they doing to be successful, and how can I emulate them?
The truth is, they all do have one thing in common – they all have a personalized trading plan that works for them and they stick to it religiously.
How to create a winning trading plan
What is a trading plan?
In simple terms, a trading plan is an outline that contains details of your trading strategy, that will be used as your source of guidance throughout your trading journey.
It can be adjusted as time goes by when you gain experience and expertise, but it is generally adhered to by the trader strictly and consistently.
5 main factors that should be included in your trading plan
So, what should you include in your trading plan? Below are 5 main things successful traders keep on their radar at all times and abide by strictly:
The types of products and markets you will trade
When you first start out with trading, you should always clearly define the financial markets and type of products you are comfortable with trading and stick to them.
Learning the ropes of how one product or market works takes time and dedication, and you cannot expect to be an expert in various markets and products overnight.
When you limit yourself to a small number of products, you give yourself the space to grow as you go and avoid taking on too much-uncalculated risk.
Your entry and exit rules
Secondly, you should define your entry and exit rules, to indicate the market conditions when you would like to enter or exit a trade. These rules should be complex enough so that they make sense and can lead to effective trades, but they should not be overcomplicated with too many stipulations that could prevent you from making a trade at all.
A rule could read like this: ‘If the value of stock X reaches Y within three days, then I will buy Z shares.’
You will find that many successful traders tend to prioritize their exit rules over their entry rules. This is because exit rules are generally more important and can determine if you will close a trade with a win or a loss.
An exit strategy should always be set the moment you enter a trade so that you will be able to make decisions in time even when markets are moving rapidly.
Many traders use tools to realize their exit rules, such as stop-loss orders, which can be placed when a trade is opened.
This way, when the value of an asset takes a turn for the worse and dips below your expected level, the order will automatically be executed and losses will be minimized.
Setting stop-loss orders can also take the human emotion out of trading, and it can be particularly helpful for traders who have a hard time letting go of underperforming investments.
You should also take some time to outline a set budget in your trading plan. This includes the amount you are willing to trade monthly or overall.
Setting a budget is crucial and is often seen in the trading plans of successful traders because it is a good way to hold yourself accountable and prevent yourself from over-trading, which can lead to unnecessary and unplanned losses.
Your risk tolerance
Your risk tolerance is the amount of loss you are prepared to handle when you commence your trading journey. Over time, this may change as your lifestyle and perspective change, and they can be adjusted accordingly.
How much risk you are willing to take on usually determines the type of trading strategy you will utilize and the timeframe of your trades, as some ways of trading and markets are naturally more high-risk and volatile than others.
For example, those with lower risk tolerance may gravitate towards investing in stocks of a well-known company over a longer period, such as months or years. On the other hand, an experienced trader who is knowledgeable about the performance of crypto markets may gravitate towards taking their chances in the ever-volatile crypto market for a win.
Another factor to consider in risk tolerance is your age. Many people think that the older a trader is, the more experience they have under their belt and therefore are more likely to take big risks. However, that is not always the case.
In fact, studies have shown that the opposite is true. In this day and age, younger traders tend to make bolder trades as they have time to recoup their losses if they ever make a wrong turn.
Older traders, particularly those around retirement age and beyond, on the other hand, tend to be more conservative in their approach. They do not like to gamble on their retirement funds as they do not have time to make more money.
Yet that is not a hard-and-fast rule that applies to all traders. Ultimately, risk tolerance is a deeply personal thing, and it depends entirely on what feels right for a particular trader in their unique situation.
The most important thing to know is that it is vital if you want to achieve success in your trading journey.
Your trading goals
Finally, your trading plan should take into account any trading goals you will have. These come in the form of the amount of profit you would like to earn by a set date, or the number of trades you would like to execute within a certain timeframe.
The importance of having trading goals is so that you always have something to work towards, and consequently, it becomes easier to see where you are falling short and where you need improvement.
Some common trading goals are part of a larger financial goal that will take longer to achieve, such as building up a pool of money for a child’s education fund, a mortgage, or a retirement fund.
In which case, this will have an effect on your risk tolerance as well, as most people will not be able to afford to put their child’s financial future on the line in a highly volatile market, while one who is trading to earn some quick-cash with disposable income may find it more palatable to take on high-risk trades.
The final word
With all of this said, what is equally important for traders to be successful is to stick to their trading plan and make adjustments as they grow in their trading journey.
No matter how great your initial plan is, it is of no use if you do not pay any attention to it, and it is bound to become outdated throughout the years.