Most traders know they need a trading plan to be successful in trading before starting the trading. But may do not know why trading plan is required? What one trading plan is? In this blog our intent is to explain what is a trading plan?
What is a Trading Plan?
A trading plan is a setup between markets and yourself. A business plan which you build in an unstructured market environment to discipline yourself. Thus, apply SWOT analysis at the start of your trading plan. Know your strengths, weaknesses, opportunities and threats. The cash flow, profit/loss, strategies are few of the main parameters to be keep in radar while building a trading plan. Though trading plan consists of many parameters, traders are advised to keep it concise to A4 sheet of paper.
The 5-key elements of a trading plan consists of:
- Capital adequacy
- Risk Management
- Money Management
- Watchlist management
- Diversification
Holding yourself responsible
You should create trading strategies with an edge with strict set of rules. A set of rules although easy to remember needs to be documented. When money is directly involved in any business emotions come into picture and rules if not documented can be broken or changed. Thus, traders are advised to document their trading plan and constantly remind yourself. So that they become harder to break. Of courses to follow trading rules diligently traders need discipline. Therefore, having a trading plan documented will provide odds of winning greater.
There are chances of getting carried away even though when you a proven strategy with no trading plan in place. As these rules are broken, your strategy then becomes different to that strategy you knew was profitable. So question yourself and test new set of rules even work. Also with appropriate risk management and money management plan in place. For example, Limit your risk as 2% of your per trade and 2% of your capital at stake is well. This keeps your risk and money management plan in place. Be patient and paper as well as live test your strategy initially with small quantity. But without this contract between you and the markets that risk may start creeping up when you get impatient or when you get greedy with a winning streak.
To conclude a trading plan is there to keep yourself accountable to the markets and ensure consistency in your trading.
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