The ChoosaBroker Trading Academy
11.7. How to Build a Trading Plan: Fail to Plan – Plan to Fail
One of the first steps to being a successful trader is to build up a successful trading game plan. This is true whether you are into stocks, options, commodities or Forex. A standard trading game plan designates the conditions that must definitely be met for trade entries and exits to occur. It includes specifications for trade entries, including triggers and filters, as well as guidelines for exits, stop-losses and money management.
Basics of a Game Plan
Having a Reason to Enter
Trading is not done on hunches or hot tips. It needs study and practise. The first step in developing a game plan is having a reason to enter the market. This will be dictated by the type of market and the time horizon you intent to trade. One can get ideas by researching books as well as visiting reputable trading websites. While, you can certainly borrow from what has worked for other successful traders, it is best to develop your own set of rules that best suit your personality.
Most professional traders advocate not risking more than 2% of your entire capital on one single trade. As far as setting profit goals are concerned, the ideal scenario is having a risk-to-reward ratio of at least 1:2.
Finding Trade Entry Points
Finding areas within a market where price are likely to reverse or breakout will help you determine profitable trade entry zones. However, entry points must be so located that they meet your risk – TO – reward profile.
Establishing Exit Strategies
Once a trade turns profitable, knowing when to exit is the most important question. Trades are exited when the original premise for you entering in to the market are no longer valid. This is true both for profitable and loss making trades
Having a successful game plan will amount to nothing if you don’t have the discipline to follow it religiously. Emotional interference should be kept at a minimum, and trading decisions should always be rational and well thought out.
Types of Trading Strategies
- Trend Trading – Trend trading is a strategy that tries to profit through the analysis of an asset’s longer time price direction. A trend trader initiates long positions when a market is trending up, and looks to go short when the trend is bearish.
- Momentum Trading – Momentum traders are not concerned with chart patterns or the fundamental value in a market, and only trade assets that are in the news. These often tend to the high volatile, high volume movers at any given point in time.
- Contrarian Trading – Contrarian trading is a trading style that goes against the prevailing market trend by buying assets that are faring poorly and shorting those that are performing well.
Backtesting and Paper Trading
Advantages of Having a Game Plan
Having a game plan before jumping on to trade is like getting hold of a map before embarking on a journey in a foreign land. The objectivity and clarity that a robust plan provides can be a real aid when you need to make split-second decisions to take advantage of the opportunities that arise in the fast paced world of financial markets. Furthermore, having a game plan helps us treat trading like a business. Anyone running a successful business knows the importance of a business plan to create a framework from which to achieve greater profit. The same hold true in trading. However, the most notable advantage of having a trading plan lies in its ability to enable us to take logical trading decisions. This is easier said than done. Ask a trader who has just suffered a big loss. His confidence must be at rock bottom, and fear must be reigning supreme. Having the confidence to return to trading after taking an emotionally gut wrenching loss can ultimately separate the winners from the losers. A successful game plan gives us the belief that profitable trades will outnumber the losses as long as we stick to our strategy.
Skewing Odds in Our Favor
Losses in trading are inevitable. There is no “Holy Grail.” So quit searching for one. Our only job as traders is to stack as many odds in our favour as possible before entering in to a trade. Create a solid trading plan. Backtest it under diverse market circumstances, and if found profitable, follow the plan no matter what the “pundits” have to say. Check out the best online brokers for further insights.