Why is a trading plan is essential for success?
Struggling to decide what makes the perfect forex trading plan? Curious to know how to produce the right trading plan for beginners?
One of the first things our students ask about is how to get their trading plan right for the very best chances of success.
Our answer – understand the rules of trading and then follow them.
A broker once told us that, in his opinion, as many as 70% of traders fail to use a stop loss to protect themselves. In the world of trading, this is certainly considered to be breaking a basic rule. So where do traders’ rules come from, and how would you know if you were breaking one?
Getting the right trading plan is part of the solution. Trader education courses will ensure that you’re following high probability strategies, that you understand the basic tenets – the foundations – of trading the markets, and that you know the practicalities of how to place trades and more. Of course there’s also trader psychology and strategies to master, as well as the language and the understanding of the concept of risk management – and then the practice of how to achieve that. Through trader education you’ll gain a clear insight into how profits are made. So, some rules come from understanding the theories, the techniques and the practice of trading.
But in addition to this, experienced traders use a personalised trading plan. This plan retains relevance in the short and the long term. A key difference from the fundamental rules established above is that the trading plan is personalised and is controlled in every way by you.
So, what is a trading plan?
It’s a clear plan of action outlining what is to be done, how it is to be implemented, when and why. It operates as a prompt to keep you focussed and on track. It’s based on your starting point on the trading journey, your key milestones and your personal trading goals.
And what should be included?
You’ll be including how frequently you’ll trade, whether you’re day trading or swing trading, and which markets you’ll trade. It documents which strategies you’re using, and your risk per trade and per day. You might include details of how and when to enter and exit your trades, how you’ll manage your analysis, and your money management. When will you change from a demo account to a live account? How will you record your trading results? You’ll reference your trading system (we use the ProTrading System here at Trading College). You’ll note how you plan to deal with changing market conditions.
What’s the purpose of a trading plan?
In essence, the trading plan is your own set of rules. It avoids poor decision making. It is the reference point to keep you focused on the commitments you defined at the outset. It stops you drifting off track.
The dangers of operating with no trading plan include loss of direction and focus. You may get distracted. You may over-trade, or forget your money management lessons. Importantly, you may miss the opportunity to learn from analysis of your actions and decision making.
The best traders track their successes and their failures consistently, and without emotion. Recording your results is vital for understanding your progress. Your documentation will include your entry points, stop position and exit points to assist you to reflect on whether you actually followed your strategy. Did you snatch profit, or did you let the trade run? How did you manage the trade? This is where you’ll find your ‘lessons for tomorrow’. Measuring is a vital tool to attaining consistency in your trading.
If you’d like assistance to develop your personal trading plan, join us at Learn to Trade Live, as the first step. It’s a chance to meet our friendly team and find out more.
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