Developing a detailed trading plan is important to ensure that you set specific goals, manage risk, and have a clear strategy for trading. Below are detailed principles for building a trading plan:
Table of contents
1. Determine Trading Goals:
- Set specific goals for your trading plan.
- Financial gain: This goal is usually to make money or generate income from trading. You can set a specific amount you want to achieve or a fixed profit rate.
- Capital protection: This goal is to preserve the capital you have invested and avoid major losses. This usually involves placing stop losses and managing risk.
- Skill Development: Trading can be used to learn and develop trading skills. This goal could be to improve market analysis, time management and risk management.
- Financial freedom: Many traders’ goal is to achieve financial freedom, which means having enough money to live the life they want without worrying about finances.
2. Choose Trading Strategy:
Determine the specific trading strategy you will use. This includes deciding whether you will trade fundamentals, technicals, or use both.
- Short-term trading: This strategy involves buying and selling assets on the same day. Traders often focus on short-term volatility and typically do not hold for longer than a day.
- Trend Trading: In this strategy, you try to identify and participate in long-term market trends. You can buy when the market goes up (uptrend) or sell when the market goes down (downtrend).
- Reversal Trading: In contrast to trend trading, this strategy focuses on participating in reversal points in the market. You try to predict the change in price direction.
- Forecast trading: This is a strategy that focuses on capturing medium-term price movements over a period of days to weeks.
- News trading: This strategy relies on economic events or news events to predict fluctuations in the market and make trading decisions.
- Automated trading: Using computer algorithms to execute trades according to previously determined rules and conditions.
3. Trading Risk Management:
- Determine how much risk you can accept per trade and in your overall portfolio.
- This includes setting stop-loss points and determining the maximum limit for each trade.
4. Determine Position Size:
- Decide how much money you will invest in each trade.
- This helps you ensure that you do not put too much capital into one trade and maintain better risk management.
5. Transaction Scheduling:
- Determine how much time you will spend trading. Try to stick to this schedule and don’t let emotions influence your trading decisions.
- Determine the best timing for the strategy: Each trading strategy can work well over different time periods.
- Identify trading sessions: Identify important trading sessions and decide which ones you want to participate in. For example, the Asian, European and American sessions have their own characteristics and different operating times.
6. Create Transaction Book:
- Record information every time you trade: When you make a trade, record all relevant information in the transaction book. This includes information about why you decided to open and close the order.
- Accurately record information such as time, price, position size, reasons behind buy/sell decisions, and trade results. The trade book helps you track performance and learn from previous trades.
- Set goals and manage risks: Based on information from the trading book, you can reset your trading goals and manage risks more effectively.
- Adjust and update your trading book: Your trading book is not set in stone and can be adjusted and updated as you deem necessary.
7. Learn and Adjust:
- Continuously evaluate and adjust your trading plan based on experience and previous performance. Never stop learning and improving your strategy.
- Review and evaluate previous trading results: Start by reviewing all the trades you have made in the past. This includes both profitable and losing trades.
Identify mistakes and learn from them: Identify the mistakes you made in losing trades and learn from them.
8. Patience and Self-Discipline:
- Follow your trading plan with self-discipline and patience. Never defeat a plan because of emotions.
- Practice careful risk management: Determine the specific risk ratio for each trade and stick to it. Make sure you don’t put too much capital into one trade.
- Track and evaluate performance: Track the results of each transaction. Evaluate your performance and review strengths and weaknesses. Self-discipline requires you to challenge yourself to improve.
- Stick to your trading principles: Self-discipline requires you to stick to your trading principles without being swayed by emotions.
Remember that building a trading plan isn’t just about having a strategy, it’s also about sticking to that plan and tracking your performance. It is a continuous process and requires patience and discipline.