Steps to building an effective trading plan

Steps to building an effective trading plan

Not planning is a plan to fail–now that may sound harsh but ask the top traders what is the secret to success and they’ll tell you that planning is key. In fact, they’ll tell you that there are just two ways of going about this: follow a written plan to the tee or fail. Visit

Have written a trading or investment plan? Well then good for you because then you fall under the list of the few people who are well prepared. Planning, researching, and making the effort to create a trading approach can be time-consuming but it’s all worth it in the financial markets. Though nothing could guarantee you sure shot success, being ready with a trading plan is one task done!

Steps to building an effective trading plan

Every trading plan is unique because every trader would have their own set of trading goals and approach that reflects their style. Every approach will take into account various aspects such as risk tolerance and style of trading. Here are a few more aspects that one needs to take into consideration:

  1. Assess your skills

Do you think you’re ready to trade in the live market? Were you able to practice your strategy through paper trading? Are you sure it would work in a live market? Do you trust the signals and are not reluctant about them? Trading involves plenty of give and take. If you want to win in this market, you need to be geared up to make a profit. Having a plan to do so will save you from making costly mistakes.

  1. Prepare yourself mentally

What is your state of mind? Did you sleep well? Do you think you’ve got what it takes to face the challenge that lies ahead? You must be both emotionally and mentally prepared to take on the market or it is best to not trade. Go underprepared and you will find yourself scrambling. Can’t seem to focus? Too preoccupied? Feeling angry? Stay away from the market because it demands your complete attention.

Several traders are known to have a trading mantra that helps them get into the zone. Maybe you could create one too because if you do not approach trading like the business that it is, you may lose a lot of money.

  1. Set risk level

What percentage or part of your portfolio should you consider risking per trade? This would heavily depend on what your style is and how much risk you can take. Though the amount of risk you take per trade could change, it is wise to keep it within 1% to 5% of your portfolio per day. If you lose that much in a day, you should call it a day and come back to the market the next day.

  1. Set goals

Don’t jump into a trade before assessing what your goal is. Set your profit targets realistically and also have a risk/reward ratio clearly defined.

  1. Do your research

Get into the practice of checking what happens around the world before the market opens. What do the international markets look like? Are bullish or bearish? How are the S&P 500 index futures behaving in the pre-market? Remember that Index futures can be great in assessing the market’s sentiment before it opens for trade as futures contracts trade round the clock.

Are there any economic or earnings data that may emerge soon? If yes, when? Keep that list handy and take a look at it whenever you want to trade before a key report is due. A majority of traders would find it better to trade once the report is out rather than risking it. The reports could lead to volatile market conditions which may not always be the best.

It is wiser to not gamble and trade on the probabilities. Entering a trade when you know a kept report is expected is nothing short of a gamble because there is no way to accurately predict how the market would respond to it.

  1. Preparation

No matter which trading system and program you work with, put clear identifiers in place for major and minor support and resistance levels on the charts. Make sure you have set alerts for entry and exit signals which are easy to identify on the basis of a clear visual or auditory signal.

  1. Set exit rules

A common mistake that a majority of traders end up making is that they keep hunting for buy signals and are so engrossed in doing so that they do not realize when it is time to exit the market.

Many traders are afraid to sell off their trades because they’re running into a loss. Well, learn that in trading, there is no way you can avoid loss. It is part and parcel of the process. Accept it and you will be a better trader. There’s nothing personal about incurring a loss and it is by no means a comment on you as a trader.

If your stop is met, you got a trade wrong and now you have something to learn from and add to your trade journal. Everyone loses money but the secret lies in managing your funds in a way that you make a profit overall.

Plan your entry and exit into the market well in advance. Remember that every trade has at least two exit points. You may have it all in your head but you have to write them down: what is your first stop loss? Where would the next one be? Put them all out in writing.

Your trades must all have profit targets that you want to meet. Once you reach that point, it is best to take out at least a part of your profit. Know more mt5 brokers.

  1. Set entry rules

Knowing when to exit a market is much more important than identifying your entry point.

You can have as complex systems as you like to ensure they’re effective but they need to be flexible enough to allow quick decisions. Don’t create a system where you need to meet 20 different conditions out of which a majority of them are subjective. You would not be able to trade smoothly. This is a major reason why sometimes, computers are better traders than people as they don’t get carried away and exit the market at the right time.

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