Many traders might not know the importance of having a trading plan. Moreover, some of them do not know what points should be considered in making it.
A trading plan is a checklist of what needs to be done before we enter the market. Besides, the trading plan also includes short-term and long-term plans, as well as how to realize them. It does not have to contain long and detailed sentences. You can make it short, clear, decisive, and covers all aspects of your trading methods and strategies.
According to Guru Trade, before you starting trading, you should have a trading plan, because without it you will look like a traveler without a road map.
Why Do We Need a Trading Plan?
Reduce Emotional Risk
The main reason why we must have a trading plan is to prevent emotional involvement in trading. As we already know, the way forex trading involves emotions can be fatal. Both a sense of wanting to “revenge” when you’re losing or a feeling of euphoria when profit.
Such a thing will not happen if we are disciplined in following the plan. We let the market respond to our trading positions, without having to worry about what will happen. We do not have to open new positions if the ‘checklist’ in our trading plan does not require that.
Improve Trading Quality
Trading quality is the accuracy of our trading positions that the market will respond to. This is very closely related to the trading methods we use.
Of course, adequate trading quality can be obtained from trading experience both with demo and live accounts which we then formulate briefly, concisely and decisively in our trading plan.
What should be in the trading plan?
Here are some points that should be listed in a trading plan. Maybe you can add additional points that you think are important, but you should not overlap so that it makes you less explicit in following them.
The purpose of trading
Make your trading goals detailed and clear. Apart from that, you also have to plan your goals in the short and long term.
Trading methods and strategies
The way you analyze market conditions and the application of your trading methods to certain market conditions.
Trading strategies that you will apply to certain market conditions, for example, if the market is trending strongly you will apply averaging or pyramiding techniques by utilizing the trailing stop facility on your trading platform.
Money management
The most important thing is knowing your risk and profit ratio (risk/reward ratio) and the volume or lot size of each position you open. This is very relative depending on the balance in your account. For example risk per trade is between 3% to 5% of balance, and risk/reward ratio = 1: 2.
Read more: 3 Steps to Overcome Stress in Forex Trading
