Trading For Beginners #3

Plan to Trade and Trade to Plan

What is the trading plan?
Having a suitable trading plan is one of the most important aspects of
trading. It's there to act as your own personal decision-making tool,
helping you answer vital questions like what, when, why and how
much to trade.
Your plan should cover your personality, attitude to risk, trading goals,
risk management rules and any trading strategies you intend to follow.
It is vital for your trading plan to be personal to you. It's no good
copying someone else's plan, because that person will very likely have
different goals, attitudes and ideas to you. They will also almost
certainly have a different amount of time and money to dedicate to
trading.
Difference between a trading strategy, a
trading plan and a trading diary
You'll hear these terms used a lot in the industry, often interchangeably, but
for the purposes of this course we'll be talking about specific things when we
refer to them:
• A trading strategy defines precisely how you should enter and exit trades.
For example, 'Buy gold when it drops below $1300, sell when it reaches
$1350' would be a very simple trading strategy.
• A trading plan is a comprehensive blueprint covering everything from your
goals, motivation and attitude to risk, through to risk management rules
and analysis of past trades. It can (and should) include both your strategies
and your commitment to keeping a diary.
• A trading diary is a written record of everything that happens when you
trade, including entry and exit points, profit/loss, trading statistics and
even your emotional state before, during and after each trade.
Why is a trading plan important?
• It makes trading easier .A trading plan gives you guidance on when and how you should trade. Without a
plan you might be constantly worrying about which market to trade, whether to take your profits early, let
your losses run, or if you're missing out on other opportunities in different markets. With a trading plan
you've done all the thinking upfront, so you can wait for the right market conditions and trade according the
parameters you've set for yourself.
• It helps you trade without emotion. A plan can remove emotional decision-making in the heat of the
moment. You should already know your desired profit, and acceptable loss, on every trade before you place
it. This means you'll be able to cope with any dramatic changes in the market price as your trade is in
progress. Realistically, markets can only go up or down, so you should be able to plan for every eventuality
beforehand.
• It helps you to maintain discipline. Discipline is an extremely important trait for a trader. Anyone can get
lucky on a few trades, but a disciplined trader is much more likely to be profitable in the long run. And if you
have a solid trading plan, discipline is much easier to maintain. By maintaining discipline and sticking to your
plan, you could potentially turn a losing strategy into a winning one – or at least discover how and why it
wasn't successful.
• It enables you to improve. By following a trading plan, and maintaining a trading diary, you can keep a
record of what works for you and what doesn't. This is useful for analysing your own performance and
improving as a trader. A full record of every trade makes it much easier to learn from your mistakes, and to
evaluate which trades you won (or lost) by luck or by judgment.
How to make a trading plan?
All trading plans are personal and unique, so there's no set formula for creating the perfect plan. However,
most should address the following in some capacity:
• Motivation
Why do you want to become a trader? Is it for the money, for the excitement, or simply to learn more about
how the financial markets work? Whatever it is, it's a good idea to write it down because your motivation is an
essential part of who you are as a trader.
• Time commitment
Before you get down to the real business of trading, it's sensible to work out how much time you can commit
to it. Individuals looking to make a large number of trades per day, for example, will need to dedicate a lot
more time to trading than, say, investors looking to buy assets that will appreciate over several years.
It's also important to spend enough time preparing yourself for trading, which includes education, practising
your strategies and analysing the markets.
• Trading goals
Once you've written down your motivation for trading and the amount of time you're willing to commit, you
can start defining your trading goals. These goals shouldn't simply be grand statements about how you're going
to buy a big house or a yacht with your winnings. To be effective, trading goals need to be Specific,
Measurable, Attainable, Relevant and Time-bound. In short, they need to be SMART:
Attitude to risk
Market prices are always changing and even the safest financial
instruments carry some degree of risk. An investment that seems like
an exciting opportunity to one person may feel dangerous and stressful
to another. So before you start trading it's important to work out how
much risk you're prepared to take on, both for each individual trade
and over your trading strategy as a whole.
Your attitude to risk usually goes hand-in-hand with your trading goals.
For example, a trader looking to make 100% returns every year might
be happy to take on increased risk to achieve the objective. While a
more conservative investor might only want to risk a small amount of
investment capital to realise 10% yearly growth.
Trading capital
It's now time to get serious and look at money. Specifically your money and how
much of it you can afford to dedicate to trading. This is your trading capital.
It should go without saying, but it's vital that you don't risk more than you can
afford to lose.
While no one trades to lose money, you need to be aware that some traders do end
up losing their entire trading capital and sometimes a lot more besides. You always
need to make sure you can afford the maximum potential loss on every trade, so do
the maths every time you open a position. And if you don't have enough at the
moment, practise trading on a demo account until you do.
Markets to trade
With so many markets available, how do you choose which one to start with?
Research is an essential part of trading, so it makes sense to begin by looking at the
markets you have a particular interest in. If you like to keep up with technology trends or
retail companies for example, then trading on stocks in these industries is likely to come
more naturally than speculating on commodities such as corn or cattle.
• t's also crucial to look at the following:
• Trading times – when is the market open?
• Volatility – on average, how many points does this market move in an hour/day/week?
• Position/contract size – how much will you gain or lose for every point of movement in
the price?
If these factors don't fit with how you want to trade, or your attitude to risk, then pick
another market.
Once you've made your decision, it's important to stay focused. The more you understand
about your market and why the price moves, the more likely you'll be able to predict future
movements with accuracy
Record keeping
For a trading plan to work it needs to be backed up by a trading diary.
This is where you record everything that happens during a trade, including why you entered it, the
expected profit and maximum risk, the entry point, exit point and how the market behaved during
the trade. You should also record how you felt before, during and after the trade, as this will help
you keep your discipline and avoid making decisions based on emotion.
If, for example, you closed a trade early because you were afraid the market was going to turn –
write that down. Did the market continue in your favour to reach your target level, or did it move
against you as you thought? Record why you decided to deviate from your plan. Did your emotions
get the better of you, or does your plan need revision?
Record keeping also enables you to see how you're performing over a period of time:
• Are you generally profitable or are you losing money?
• What's your win percentage?
• When you win, is it usually by more or less than when you lose?
• Are particular markets/times of day/trade setups more profitable than others?
Keeping track of these statistics will enable you to become a better trader and help you on the way
to achieving your goals.