Do we have a plan while we trade in markets? A question we should ask ourselves even before opening a demat account. A trading plan is a roadmap for how to trade, and no trades should be placed without a well-researched plan.
A trading plan is written and followed rigorously. It is not altered until and unless there’s something which is not working according to the written plan. A basic trading plan has entry and exit rules, as well as risk management and position sizing rules. The trader can also plan in the direction of when and how to trade while making a plan.
When people come into the world of trading many think that they only need to learn about the strategy and follow the rules of the strategy, while most of them follow the same for a while. And then there are those who do not get the foundation of the strategy and randomly trade in the markets without understanding the implications the volatility can have on the capital.
Table of Content
Trading Plan
- Understanding Trading Plans
- Setting Risk Level
- Setting Entry and Exit Rules
- Analyzing Performance
Understanding Trading Plans:
A trading plan refers to a complete set of rules based on thorough research that incorporates a trader’s objectives, time, and risk tolerance to cover every aspect of a trading period.
Trading plans can, at the same time, be simple. With a thorough and well-researched plan, a trader can monitor the performance and evaluate the trading strategy.
In the case of an amateur trader with no trading plan and strategy, it is often found that they enter the market ill-equipped with information and details about the risks and rewards. Hence, they experience vulnerable losses due to buying too speculative securities or trading on emotions.
Setting Risk Level:
Risk depends on how much you are willing to put your capital out in the markets followed by the strategic plan with thorough research. The amount of risk can vary, but should probably range from around 1% to 5% of your portfolio on a given trading day.
With this risk taking limitation, a trader needs to pre-plan the trading strategy, so that if there’s a possibility of losing the amount at any point in the day, the trader can get out of the market and stay out until there’s a bit of stability experienced.
Setting Entry and Exit Rules:
Before you enter a trade, you should know your exits. There are at least two possible ways to know your exits. First, what is the stop loss if the trade goes against the market conditions. Second, each trade should have a profit set. Exits are far more important than entries.
A trade entry can be initiated with either a buy order for a long position, or sell order for a short position. The entry point is usually a component of a predetermined trading strategy for minimizing investment risk and removing the emotion from trading decisions.
Analyzing Performance:
Traders should analyze after every trade. Adding up the profit and loss is secondary to knowing the why and how. It helps the traders to take necessary decisions concerning the future trades. There is no way to guarantee a trade will make money but analyzing the trades can help the trader to help either buy, sell or hold a particular trade.
