Featured How to & Advice

How to Create a Trading Plan

Whether you’re a newcomer or a veteran in the markets, no one is excused from not having a trading plan.

As traders, we are operating in a boundaryless and limitless environment where we have the opportunity to create our own wealth and achieve financial freedom, but there is also the possibility of financial ruin. Not creating a trading plan can be one of the factors that can lead to continuous losses and forced trades.

It may sound cliche, the need to create a trading plan, this is something we’ve been hearing everywhere since the early stages of our journey. You see it in books, blogs, articles and you hear people talk about it in videos, seminars, and so on. The reason why it’s such a cliche, just like cutting your losses small and letting your winner run, is because that’s how it works and it’s about consistency over the long run.

ADVANTAGES OF CREATING A TRADING PLAN

Creating a trading plan allows you to mentally prepare yourself for what may happen in the coming days. Remember, you will need to create your trading plan for a specific stock at least the night before you plan to trade it. This is so once the times come when the price reaches your entry points, all you have to do is execute your plan. If you plan the trade on the spot, you’re basically making impulse decisions.

The only way to make a trading plan meaningful is to actually execute on it, there’s no point in creating a plan if you always bypass your own rules. Executing on your plan without reservation or hesitation builds discipline over time, and you will definitely need this if your plan is to stay in the markets for a long period of time.

Another thing you need to remember is to “plan your trade, and trade your plan.” If you don’t create a trading plan for a stock and it suddenly goes up 20%, even if it’s part of your strategy, you should have the self-control not to trade it. This will build the discipline to always scan thoroughly for opportunities the night before.

DISADVANTAGES OF NOT CREATING A TRADING PLAN

Now, what happens when you fail to create a trading plan? You get a lot of forced trades, unnecessary losses, and a ton of impulse moments which will lead to you making emotional trading decisions; and we already know that you shouldn’t let your emotions affect your trading.

Some of you may be thinking or have experienced first hand buying a stock that didn’t have a trading plan and having it go up 20%, 50%, or even more. But here’s the thing, do you want to be rewarded by doing bad habits? The market may bail you out a couple of times, especially if we’re in a bull market, but eventually, those who don’t do the right things will be humbled.

You will experience occasional equity spikes from a few lucky trades that go up significantly, but if you continue to take impulse trades then over time your equity curve will continue on its downtrend. The consistency all traders seek in the market will not come to you if you don’t have a solid plan to take advantage of opportunities. Trading success is not a sprint, it’s a marathon. You don’t have to be a millionaire next week.

HOW TO CREATE A TRADING PLAN

The following are the key points you will need in your trading plan:

1. ENTRY. This is the price where you will make your purchase. You can have more than one entry (buying in tranches).
2. STOP LOSS. This is where you will sell your position at a small loss at a predetermined area.
3. POSITION SIZE. This is how many shares you will buy.
4. TARGET PROFIT / TRAIL STOPS. This is a predetermined price where you will sell your shares at a profit. You can also set a trail stop to take advantage of bigger moves.
5. RE-ENTRY CRITERIA. Some stocks may stop you out, but this may just mean you’re a bit too early. Have a re-entry plan just in case the stock meets your buy parameters again.

CONCLUSION

There you have it! Mga ka-Investa, always remember that having the discipline to create a trading plan is a necessity for future trading success and consistency. At the end of the day, we need to properly prepare ourselves to take advantage of the opportunities in the market the right way to achieve consistency in the long term.

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