Main Components of Trading Plan
In a business, a business plan is always required. Likewise when starting trading. Trading plan or trading plan is the stage when a trader will enter the market (entry market) and most successful traders must have a trading plan. But unfortunately, most beginner traders do not have a trading plan.
Making a real trading plan is relatively easy. There are several main components of trading plan, such as:
- Trading Objectives
- What Pair and Trading Time
- Money Management
- Documentation and Analysis of Results.
First, you must specify the trading objectives. Use some of the following questions: Why do you trade? What is your ultimate goal? Most beginner traders have goals that are completely unrealistic. For example, a beginner trader aims to get a $ 10,000 investment out of a $ 100 capital in the first year. It’s an unrealistic expectation that “kills” many beginner traders before they have a chance to flourish. If you set a 20-30% yield goal on your initial investment in the first year, it can be said to be realistic.
Next, you must determine the basic framework of how to achieve your goals. What currency pairs (or other financial instruments) would you trade? There are some traders choose a fluctuating pair but there are also traders who choose a slightly fluctuating pair.
You also have to decide when you will trade and how often you will trade. Are you going to be a daytrader, swingtrader or longterm trader (holding position for long period of time)?
Financial management is probably the most important aspect of trading. Even the best analysts will eventually destroy their own account if they do not manage the risk well. First, you need to determine how much capital to fund your account. Then you must determine how much risk on each trading (transaction). Most trader risk is 1-3% of account balance. Secondly, you must determine your RRR (Reward Risk Ratio). This can vary based on your overall trading strategy.
The final step is to track your results through the creation of a journal. Usually the journal will have the following columns:
- Symbol (e.g. – EUR / USD)
- Order (buy or sell)
- Lot (how much is bought / sold)
- Risk (in dollars)
- Profit potential (in dollars, you need one column for each profit target you have in your strategy)
- Result (Profit / loss in dollars)
- Equity (account balance after transaction closed)
- Note (to track the logic underlying this trading)
This is a pretty basic start to having a trading plan. Happy making Trading Plan ..