There is a golden rule in trading which goes “Plan your trade, and then trade your plan”. A house won’t be built without an initial floor plan. It would be like buying random building materials without knowing where you would actually use them. It’s also the same with trading. You don’t simply enter and exit a trade whenever you want to. You should have guidelines that would indicate the right timing to make a certain action. This is what you call a trading plan.
What is a trading plan?
A trading plan doesn’t really differ a lot from other plans you can imagine. It is more like an outline of your activities, something like a to-do-list in trading. By definition, trading plan pertains to a set of guidelines to define your trading activity. You think of it as a road map. It shows a route which you need to take from where you are and to where it leads. Metaphorically speaking, it gives a clear picture of your journey. It does not need to be a complex system. It would only provide you the basic guidelines of what you need to do.
What do you need to put on your trading plan?
There is no exact standard of what you need to put on your trading plan. However, a typical trading plan contains certain important elements. These include your profitability goals, position sizes, how to manage these positions once you’ve taken them, and a criteria of when you will enter and exit a trade. These elements are not constant. They should be adjusted in each of your trades in order to meet their varying market conditions.
Why do you need a trading plan?
Overall, a good trading plan will help you identify your goals, manage your emotions and trading risk, and help you decide when to take action. The most common mistake of traders is following their emotions. These emotions, when challenged, tend to betray a trader. Having a standard to follow helps in controlling the decisions made from emotions by sticking to the initial plan. It helps to keep the trader in the right direction when they begin to waver from their original path.
Read more about the 5 emotions that go against trading.
What happens if you don’t follow your trading plan?
There is a saying that “If you fail to plan, you’ve already planned to fail”. Not following a trading plan transforms your trades into gambling where you simply use your intuition and luck in order to win. In other words, you can’t ensure your success. This doesn’t mean that you are guaranteed success if you have a trading plan. It simply increases your chances of winning through a systematized plan.
There may be times that it could have resulted better if you listened to your intuition and not have followed your plan. Yes, you might have earned a few more profits, but following your initial plan saves you for a longer term. With your decision to follow it, you’ve made a step towards building the most essential value in trading, discipline. In the long run, only the disciplined traders will become consistently profitable. Make sure to trade with your plan and secure yourself a better future in trading.
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