Why use a Trading Plan?
A trading plan will take away the
risk of making spontaneous decisions in the heat of the moment. By having a
trading plan for all market situations you are minimising the risk of
irrational behaviour. As many traders with a plan say: "if you fail
to plan, then you've already planned to fail."
5 Reasons to have a
Trading Plan
- Understand the difference between justified and unjustified wins. A justified win is when you’ve followed your trading plan. An unjustified win will possibly leave you with profit, but due to chance and luck rather than a well thought out strategy.
- Decide in your trading plan what risk capital you have. This is money that you can afford to lose, it won’t affect you paying your bills or losing your home. If you are using risk capital you are more likely to make trading decisions which are objective.
- If you can see from previous data that a trend is forming which could be profitable go with this instinct. It is tempting to get led away from your trading plan by what others are doing but always stick to your plan.
- Put in a Stop Loss or Take Profit order. Whilst doing this, check the support and the resistance levels of the asset. Also remember to not place the Stop Loss or Take Profit at the same rate as the support or resistance levels.
- Decide what your profits are, to make profits of 10% a year or make 100% returns? Depending on your goals the time you dedicate to your trading plan will vary. You must be prepared to tweak, gain experience and adjust your plan to meet your expectations.
At the end of the day if you are
not sure of your trading plan then stick to a demo account until you feel ready
to jump into the real thing.
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