Those who fail to plan, are planning to fail. This is a common saying. Another one I like is: Prior Planning Prevents Piss Poor Performance. Both of these sayings are true for you because trading is not a game and the successful trader spend a lot of time planning and preparing. You must learn to understand the importance of having and using a trading plan. Therefore this article helps you to prepare your first trading plan.
Are you ready for trading? Have you tested your system using a demo account and do you have confidence with it? Can you follow your signals without any hesitation? Trading in the markets means taking losses. The real pros are prepared and they take their profits from the rest of the crowd who, lacking a plan, make mistakes and give their money away.
What are your strengths as a trader? How long have you been trading? Where did you learn? Do you have a mentor? Do you attend any training? Where do you record all your trades, so you can analyse them? Your first trading plan should include answers to these questions.
This is all about how you are today. Whether you got a good night’s sleep. Did you have a good day yesterday? Do you feel ready for the challenge ahead? Have you just had an argument?
If you are not emotionally and psychologically ready for fighting, then trading the market is not good today. Take the day off – otherwise, you could make mistakes. It is guaranteed to happen if you are raging or angry, distracted or preoccupied.
What is your pre-trading ritual?
Or what exercises do you do to prepare yourself for your screen time?
What music do you listen to before trading?
Some traders have a market mantra they repeat before the day begins to get them ready. Create one that puts you in the right mindset.
Set Risk Level
What percentage of your account are you risking per trade?
How many trades are you allowed open at any time?
How big are your stops?
If all trades lost, all at the same time, what’s your exposure?
This will depend on your trading style and risk tolerance. It will normally range anywhere from around 1% to as much as 5% of your portfolio on a given trading day. That means if you lose that amount at any point in the day, you get out and you walk away. Trust me when I say that you will not be able to do this easily. It will feel wrong. But it’s not. It’s absolutely the right thing to do.
“It is better to keep the powder dry to fight another day if things aren’t going your way.”
What is your profit target?
What is the minimum risk/reward you will accept?
How long will you be prepared to keep the trade open?
What is your required reward to risk ratio?
What time of the day would you ensure trades are closed?
Where are you recording your daily results?
What’s your daily profit target?
What’s your monthly profit target?
How are you managing your performance against your goals?
If you don’t set goals, how can you realistically know you have done enough for that day, week or month to now enjoy with your friends and family? Traders have a habit of over trading and staying in the market for too long. That’s a mistake. Once you’ve hit your target, you’re done. Greed is only a temporary benefit. Long-term, you’ll likely lose.
Do Your Homework
What is happening around the world?
Are overseas markets up or down?
How are the FTSE and S&P500 futures going?
When does the contract contract expire on the DAX futures?
Which markets are closed today? Will that mean less volume?
What economic or earnings data is due out and when?
Make a note of the important ones and decide whether you want to trade ahead of those. We believe that it is better to wait until the report is released than take unnecessary risk. We trade based on probability. And we don’t gamble.
Whatever trading system and trading platform you use, you should be able to label the major and minor support and resistance levels. Set alerts for entry and exit signals and make sure all of the signals can be easily seen and detected. Use an alarm or an audible alert. Your trading area should not offer distractions. No children, no partners, no friends or family. Remember, this is a business, and distractions can cost you money.
Save your charts into templates, label them with some detail that you can understand. Export the templates and back them up. Have all your platforms/software/squawk services/anything you need on the computer, as a cluster of icons on the desktop.
Set Exit Rules
Most traders make the mistake of concentrating the majority of their efforts in looking for an entry on the DAX. They often pay very little attention to the exit. We often see trader unwilling to close a losing position if they are down on the day because they don’t want to take another loss. Just get over it. You won’t have a chance as a trader otherwise. If your stop gets hit, it means you were wrong. Don’t take it personally. We can sometimes lose more trades than we win, but because we are good at managing money and limiting losses, we still end up making profit.
Where are your stop losses? Mental stop losses do NOT count
Where are your profit targets? Once it’s hit, take some profit and move your stop loss to breakeven
Set Entry Rules
A trader is only successful because of the exits. You need specific rules to decide your entry.
A typical entry rule could be worded like this:
“If DAX buy signal comes and there is a minimum target at least two times as great as my stop loss and we are at support, then buy X contracts here.”
Your system should be sophisticated enough to be profitable, but simple enough to make quick decisions. If you have 15 conditions that must all be met, you will find it difficult, if not impossible, to actually make trades. Especially if those conditions are subjective. Computers often make better traders than people, which may explain why nearly 50% of all trades that now occur on the New York Stock Exchange are computer-program generated.
The more specific you make your rules, you more likely you can automate your strategy (if you have not already done so).
Keep Excellent Records
The path to becoming a good trader begins with keeping good records of your trades. If you win a trade, you want to know exactly why and how you won the trade. More importantly, you want to know the same when you lose, so you don’t repeat unnecessary mistakes. Write down details such as:The targets
- The targets
- Your entry and exit of each trade
- The time and period of the chart
- Your support and resistance levels,
- The daily opening range,
- Market open and close for the day
- Record comments about why you made the trade and lessons learned.
You should save your trading records so that you can go back and analyze the profit or loss for a particular system.
Perform a Post-Mortem
Work out your profit or loss and keep a track of it. It’s very important. However it is secondary to knowing how and why. Write down your conclusions on a spreadsheet or a trading journal so that you can find them again later.
Could you have done anything differently on the trades that lost?
Would you have done anything differently on the trades that won?
Trading on a demo account does not guarantee that you will have success when you begin trading real money. Emotions will often come into play and affect your decision making. However it will give you the confidence that your strategy could actually work. Having a strategy is only the first part. The second part is being able to open and close a trade, with no emotion. You want to make a decision without second guessing or doubting the decision.
There is no way to guarantee that a trade will make money.
You will experience losses. But that’s normal, your job is to ensure that you are not blindly entering trades. You need to skillfully place your trades, knowing that the statistics are on your side. If you do not have a trade open, that’s ok.
Trading is a business. Traders who win consistently treat trading as a business. While having a plan is not a guarantee that you will make money, having your first trading plan is crucial if you want to become consistently successful and survive in the trading game.
Read more: 10 Steps To Building A Winning Trading Plan http://www.investopedia.com/articles/trading/04/042104.asp#ixzz4kS0EuoSM
Follow us: Investopedia on Facebook