Creating a Trading Plan

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We can all agree that a trading plan is very much a necessity in our trading career. It provides traders with a clear structure to manoeuvre in the financial markets. Without a trading plan, we are like sailors without a map, not knowing where to go. Our fate, or should I say trading performance, will then be a pure function of luck.

Understanding Ourselves

Firstly, we should take a good look at ourselves and understand our personality. One important trait to consider is patience. Are you patient enough while waiting for a setup to form? Are you patient with letting trades run for as long as they can? For traders with great patience, swing trading may be a good option. However, that is not the case for traders with less patience. For the latter, intraday trading or even scalping may be more relevant. With that being said, patience is a virtue in trading. We need the patience to wait for the best setup to form. We need the patience to let the market do its thing while we are in a trade. We need patience while growing our trading account.

Time Availability

Next, determine how much time you can allocate for trading. Maybe it is a mere 30 minutes a day. Perhaps it is 3 hours daily. For those who have less available time, swing trading might be more suitable since there is no need to be on the charts all the time and vice versa.  Either way, the market is open 24 hours a day and there will always be a session for you to trade. However, do note that trading volume differs across sessions. Statistically, the London session and New York session have the highest volume traded and it might be more suitable for short term traders.

Risk Tolerance

Moving on, find out your level of risk tolerance. A risk-seeking person is more willing to incur risks compared to risk-averse individuals. The common advice we always hear is to risk no more than 1% on a single trade. 

It is imperative to know that as the risk per trade increases, the risk of ruin will increase exponentially. As Marc Lasry once said: “Most investors focus on how much they’re going to make rather than how much they could lose.  Our focus is on the downside”. Always make sure you can live to trade another day.

Type of Analysis 

Then, decide the type of analysis you are going to employ in your trading. It could be fundamental analyses, where great significance is placed on analysing economic news data and their potential impact on the markets. On the other hand, we have technical analysts who focus primarily on charts and what price did in the past. They trust that the charts will tell them what is most likely to happen next. It is optimal if we can take the best of both worlds and improve our trading edge. Write in your trading plan the source you will use for economic news. Then, choose the technical setups that you are most comfortable with and stick with them.

Number of Setups

Last but not least, it is best if we can limit the number of setups that we focus on. If we direct our attention to only one or two setups, it will ensure that we do not miss any potential trade during our trading session. It will also avoid analysis paralysis where multiple setups contradict each other.

Go ahead, create your personal trading plan and start practicing now!

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