How To Create The Ultimate
Trading Plan From Scratch
A trading plan is a set of guidelines and instructions that help you shape your trading performance while helping you to assess potential risks associated with your financial strategy.
It is important to create a detailed trading plan from scratch to get a clear picture of what it is you really want and how you are going to achieve it. A trading plan will help you identify the markets to trade in, cut your losses, and manage your risk.
However, before you start drawing one up, you need to know what a trading plan truly is and what it should entail.
Table of Contents
1. What is a Good Trading Plan?
Ask any professional trader and they will tell you they have a complete trading plan mapped out for their trading decisions. Their trading plan consists of guiding rules helping them to determine when they should trade, how they should trade, and why they should trade in a particular market. Thanks to their trading plan, they are also well-aware of the potential risks associated with a trade, what factors must be met to realize the potential of a set-up, how to manage their position, and even when not to trade in the market.
Every individual needs a trading plan that serves their personal goals and style. A trading plan or a trading journal is a useful tool that can help you determine what, when, and how you should trade.
A good trading plan is methodical and not only helps you consider important variables before you start trading but also helps you stay afloat while you are trading. It is a financial map for you as a trader.
2. The Benefits of Having a Trading Plan
Creating a trading plan might not sound too exciting and might even seem irrelevant to most people. But that is wrong. Having a detailed plan is a big step toward your success at being a trader and it is what all smart traders do.
Here are a few ways a trading plan can benefit you:
- It improves your decision-making abilities.
- It helps you not get distracted by useless financial news that seems ‘thrilling.’
- It helps you take care of your capital by helping you make financial decisions based on logic and rational thinking and not emotions.
- It builds a clear money-management path for you and helps you assess your profits and risks clearly.
- If you have a clear trading plan, you will be less likely to make sudden and hasty decisions because you will have a clear entry and exit strategy that will maximize your profits.
- It will give you precise guidelines and rules to stick by instead of wasting your money on trial-and-error. This is going to improve your performance as a trader.
- Most importantly, it will help you exercise discipline, which is a key factor in achieving trading success.
3. How to Create the Ultimate Trading Plan from Scratch
Here are the steps you can take into consideration while creating a successful trading plan that suits your goals.
Step 1: Set Your Trading Goals
Before you start trading your money anywhere, like in the forex market, you need to be clear on what exactly your goals are. It is also important that while you are setting your goals, you should be realistic about the profits you are going to generate. Keeping the risks in mind, you should set weekly, monthly, and yearly profit goals, and try to achieve them to the best of your abilities.
Step 2: Know Your Trading Profile
In addition to your training and experience, you need to answer the following questions about yourself:
- How much time and energy can you put into trading?
- What is your motivation behind trading?
- What is your trading mentality? For example, what is your attitude toward risk and risk management? Your trader mentality requires you to be honest and objective with yourself.
Understand what your trading profile is. This will help your decision-making abilities, making you an expert trader.
Step 3: Assess Your Initial Capital for Trading
People often ask me: “How much do I need to start trading in forex?” My response is always how much your brokers allow you to but also how much are you willing to risk. Without having an initial capital to start with, you will not be able to grow and multiply your money.
Another question that I frequently hear is: “Can I trade in forex without the interference of a broker?” The answer to that is simply no, you cannot. To trade in the forex market, you will need a person or institution that connects you with the financial markets.
Once you have landed on an appropriate broker, the next part is deciding how much money you would need to operate in the financial market. The answer to this depends on the type of market you want to operate in.
For instance, to start trading in the forex market, most brokers require a minimum initial capital of $100, whereas the starting capital for the stock market is much higher: usually at least $5,000, depending on the broker.
Step 4: Set Your Risk Level
An important risk management rule is to define the potential loss you can withstand for a trade. Your final loss should never exceed the pre-set amount that is in your trading plan. This technique is also known as risk-per-trade. Risk-per-trade defines the maximum risk you can take on a trade. Generally, the larger the trading account, the lower the risk level should be.
Step 5: Know Your Trading Strategy
Your trading strategy will be the blueprint on which you base your future trades. It will contain details on things like:
- Where you will make the most benefits
- When you will close a trading operation
- Where your stop loss would go
- What your target profit is
- How you would analyze the market
- Your routine before entering a trade
- Your requirements for a good investment opportunity
- The risk and opportunity associated with your strategy
A good practice is to accompany your trades with images/pictures so that you have a visual idea of what the winning and losing trades look like.
Step 6: Test Your Trading Strategy (Backtesting)
Step 7: Set a Precise Reward–to-Risk Ratio
In this step of your trading plan, you will determine how much money you’re realistically planning to earn from your trading. For effective trading, you need to earn twice as much in your winning trades compared to the losing ones, so that it is sustainable over time.
You will also need to specify your target reward-to-risk ratio. The reward-to-risk ratio is the final profit you wish to achieve with respect to our initial investment. For example, my target reward-to-risk ratio is 1:2, which means that I expect to earn twice more than the initial capital I put in for that trade.
Step 8: Define Your Trading Style
There are several different styles of trading which are mentioned below:
- Scalping: you open and close a trade within a few seconds or minutes.
- Intraday or Day Trading: you open a trade and close it within several minutes or hours. This type of trading is active only within a single trading day.
- Swing: you open a trade and close it after at least a day or several days.
- Momentum Traders: you trade in line with the current marketing trend.
- Position Trader: you hold on to a trade for several weeks, months, or even years.
Before you start trading, it is important to figure out what your trading style is. In my book trading for success you’ll find
Step 9: The Financial Instrument
Financial instruments are the sales contacts between two parties. You can buy and sell shares of a particular company that you want to trade with. You can also operate in options on shares and contracts for differences (CFDs), which allow you to analyze the future price market of your asset without actually owning the asset itself.
To own shares or stocks in a company, you will need more capital than with your usual trading. Again, how much starting capital you need would depend on your broker.
Step 10: Choose a Financial Market
Before trading, you have to choose what type of financial market you want to operate in. There are many different types of financial markets, some of which are listed below:
- Forex market
- Stock market
- Commodity market
- Cryptocurrency market
- Option market
- Bond market
There are many more to choose from! Choose a financial market that aligns best with your goals and trade in that.
Step 11: Choose Your Trading Platform
There is no shortage of platforms on which you can do your trading.
Before choosing a trading platform, you will need to know what type of marketplace you want to operate in and the financial instrument you prefer to use.
I trade CFDs specifically in the forex market with the financial instrument being currency pairs. My choice of broker is Dukascopy with whom I have had an excellent experience in every aspect of my trading. They have an on-duty customer service available 24/7 and the best part is, they go a step further in their security measures while opening an account.
Step 12: Determine “When” to Trade
Before trading, decide what time of day is appropriate for you and your trading style. Maybe it is the morning. Maybe it’s the afternoon. It might be that you want to focus on a specific session: for example, the European session or the American session.
Keep in mind that the highest volume of trading usually occurs within the first few minutes of the market opening. This time of trading is especially lucrative for traders whose style of trading is scalping.
Step 13: The Technical Indicators
Technical indicators are analysis tools that can help you make better trading decisions. They give you an idea of where the market is going. Technical analysis relies on more than just math and the probabilities of trading. The specific type of tool you should use depends on what you want to achieve with it. There are four main types of technical indicators:
- Trend Indicators
- Momentum Indicators
- Volatility Indicators
- Volume Indicators
Whether it is the forex market or the stock market, there is a technical indicator tool for everything and everyone.
Step 14: The Final Outcome of Your Trading Plan
In the last step, I would recommend you to use a template or a journal to write down your trading plan and record everything. You will take into account the following:
- Start and end date of your trading operation
- Current date of operation
- Balance on the day before trading
- Currency pairs
- Type of operation (long or short)
- The investment put into the operation
- Your entry and exit price
- Reasons for entering the operation
- Target result (either by percentage or US Dollars)
- Your profit or loss
- (Possible) errors
To make things easier for you, I have designed a free trading plan template to get you started on your trading journey
The Bottom Line
Never underestimate the impact planning can have on your goals. Having a trading plan is crucial if you want to become a long-term and expert trader. It will simplify your trading path and help you visualize your goals much more clearly.
My goal is to simplify trading and make it easy for every woman out there. If you want to succeed in the financial market and learn more tips and tricks as the ones mentioned above, subscribe to my blog.
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Recommended Resources: If you’re interested in learning more about online trading, check out my book “Trading for Success; 8 secrets why women are better forex traders” and take a deep dive into my blog.