A trading plan is a set of rules and guidelines that shape and define your trading decisions & behavior, including but not limited to: financial goals, money management rules, risk management techniques and criteria for opening and closing positions.
Due to lack of education a large number of traders have never used a trading plan and that’s one of the reasons that many of them end up in a loss. In this article we will show you how to develop a proper trading plan.
Six Point Trading Plan
The following plan shows an outline of the 6 steps that you should take into consideration before starting to trade:
1. Trading Strategy
Trading strategy basically includes your trading system; Are you a day trader or a swing trader? Which time frame you use, which market conditions you use, swing, trend, or ranging conditions.
2. Risk Management
Define your risk for each trade. How much you should risk per trade, 1% per trade and 3% on total open positions.
Which markets you like to trade in, or are good at (eg. FX, Stocks, Futures, Bonds.) Select a market that you are good at and create a trading plan for that market.
Define the entry conditions, where you will enter at Support/Resistance levels, Pullbacks, breakout or crossover.
Define your stops, where you should set stop loss, away from market structure or below the support/resistance levels, or below the Moving averages etc.
Define where you will exit the trade, by having a fixed target, or using trailing stop or using ATR etc.
We have summed up a trading plan in these six points. We hope that this plan will help you to further improve your trading. For more helpful article, check out our Forex education section.