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What is a trading plan and how do we set it up?


Financial markets are like a battlefield; Because you as a trader have to decide on your capital in a very short time. As a result, it is important to prepare for the thrill of trading before entering the field. Setting up a written trading plan and having a clear strategy is an important step in any person’s financial activities. In this article we try to help Content Published on the IJC website, let us introduce you to the trading program and how to write it.

The key is to learn how to create and execute a successful trading plan. With smart plans, you will have guidance on which market to trade in, when to make a profit, when to reduce a loss, and where other opportunities are.

What is a trading plan?

A trading plan is a comprehensive tool for deciding on your trading activity. Writing pre- and post-transaction decisions is one of the basic principles of trading. This app helps you decide what to trade at what time and how much. A trading program should be your own. You can use someone else’s plan as a blueprint, but keep in mind that the other person’s attitude toward risk and capital can be very different from yours.

Your trading plan can include anything you find useful; But it should always cover the following:

  • Your motivation for a deal
  • Time commitment (how long will you wait?)
  • Your trading goals
  • Your attitude towards risk
  • Your available capital for the transaction
  • Personal rules for risk management
  • The markets in which you want to trade
  • Your strategy and strategy
  • Steps of keeping transaction records

A trading plan is different from a trading strategy. A trading strategy or strategy determines exactly how you enter and exit trades. An example of a simple trading strategy could be “buy bitcoin for $ 5,000 and sell it for $ 6,000.”

Why do you need a trading plan?

As a trader, you need a trading plan because it helps you make sensible trading decisions and define your ideal trading factors. Decisions need to be taken out of the mind and brought to paper or screen. As long as you do not have a trading plan, your decisions can change at any time according to your feelings. A good trading plan will prevent you from making emotional decisions in critical moments. The benefits of a trading program are:

  • Easier tradingAll scheduling is done in advance and you can trade according to your pre-determined factors.
  • More realistic goals: You are already aware of your profit and loss. This means that you can separate emotions from your trading decision-making process.
  • More regular transactionsWith regular adherence to your schedule, you can understand why some trades work and others do not.
  • More space to improve performanceDefining a way to archive transaction history allows you to learn from past mistakes and improve your ideas.

How to set up a trading plan

There are seven easy steps to creating a trading plan. In the following, you will get acquainted with these seven steps.

Trading program

1. Define your motivation

Knowing your motivation for trading and when you want to spend it is an important step in creating your trading plan. Ask yourself why you want to trade and write down what you want to achieve this way.

2. Determine the amount of time you can devote to the transaction

Think about how much time you can devote to your trading activities. Can you trade while at work? Or do you have to manage your transactions early in the morning or at midnight?

If you want to trade a lot during the day, you need more time. If you are looking for assets that will grow over a period of time and use profit, loss and warnings to manage your risk, you probably will not need many hours.

It is also important to spend enough time preparing for transactions. Activities such as training, strategy training and market analysis are part of these preparations.

3. Set your goals

Every trading goal should not be just a simple phrase. An intelligent trading target must be clear, measurable, accessible, trade-related, and time-limited. For example, “I want to increase the value of my entire portfolio by 15% in the next 12 months.” This goal is smart. Because the numbers are clear, you can measure your success rate, it is accessible, it is related to the trade and it has a time frame.

You also need to specify what type of trader you are. Each person’s trading style should be based on his personality, the individual’s attitude towards risk and when he wants to devote to the transaction. There are four main trading styles:

  • Position trading: Maintain trading positions for weeks, months or even years with the expectation that they will be profitable in the long run.
  • Swing trading strategy: Maintain a trading position for several days or weeks to profit from medium-term market movements.
  • Day trading strategy: The deal opens and closes in one day. No trading position is open overnight, which avoids overnight risk.
  • Trading with Scalping Strategy: Numerous trades that are open for a few seconds or minutes during the day to generate small profits and turn big profits overall. In this method, the trader uses each of the fluctuations and so-called “sharpens” the market.

41. Choose a risk-reward ratio

Before you start trading, determine what level of risk you are willing to accept for your trades individually and as a whole. Determining the range of risk is an important category. Prices in the market fluctuate constantly, and even the safest financial instruments will be associated with a degree of risk. Some novice traders prefer to take less risk to get acquainted with the space. While others are looking for more risk in the hope of making more profit. It all depends on your point of view.

Profit to risk ratio
Determining the ratio of profit to risk

You may incur a loss more often than you make a profit; But still be in profit. It all depends on the ratio of risk to profit. Some traders prefer to use a profit to loss ratio of one to three (1: 3). This means that the potential return on investment is at least twice the potential loss. To determine the risk-to-profit ratio, compare the amount of capital you put at risk with the profit potential. For example, if you risk $ 100 on a trade and the potential profit is $ 400, the profit-to-loss ratio will be one to four (1: 4).

Remember that you can control your risk with losses.

5. Specify the capital you allocate to the transaction

Find out how much money you can spend on your trades. You should never risk more than the amount you can lose. Trading is very risky and you may lose all or even more of your trading capital (if you are a professional trader).

Do the calculations before you start trading and make sure you can handle potential losses in trading. If you do not have enough money to start now, practice trading in the demo (test) version of your account.

6. Evaluate your knowledge of the market

The details of your trading plan will be affected by the market in which you plan to trade. This is because, for example, a Forex trading program is different from a stock market or digital currency market.

Evaluate your expertise in asset and market class first and get as much information as you can about what you want to trade. Then monitor the closing or opening of the market, market fluctuations, and the amount of profit you will make in each price movement or the loss you will incur. If you are not satisfied with these factors, it is better to choose another market for your trades.

7. Start registering your trades regularly

An efficient trading program is backed by a trading history record. Use the transaction log to document your trades; Because this way you can find out what works right and what doesn’t.

In addition to technical details such as entry and exit points, you should also record the basis of your trading decisions and feelings. If you deviate from your plan, write down the reason and the result. The more details you use in your registry, the better.

Example of a trading program

You can help create your trading plan by using the questions and answers below. Remember that a trading plan is a personal roadmap. You need to consider the circumstances that are unique to you when setting it up.

What motivates me to make a deal?

For example, I want to challenge myself and learn as much as I can about financial markets so that I can create a better future for myself.

What is my time commitment?

Take enough time to monitor your transactions and at the same time determine what time of day is best for you. Some traders prefer to spend all day trading. Others set aside a certain time of day (morning, day or evening) for their trades. It is always advisable to manage your risk to the extent of losses, especially if you do not monitor it when the trade is open (you are offline).

What is a trading plan and how to set it up?
Proper timing of the transaction

What are my short-term, medium-term and long-term goals?

For example, “I want to finally increase the value of my portfolio by 15% over twelve months.” To achieve this, I decide to take advantage of opportunities three or more times during the month; But only as long as they are in line with my strategy. In addition, I want to be steadfast in this path. If I exceed my 15% goal, I increase my risk every three months and continue to learn by reading financial news for at least two hours a week.

What is the profit to loss ratio?

To calculate the profit-loss ratio you want, compare the amount of money you want to risk in each transaction with the potential profit. If your maximum potential loss is $ 200 and your maximum potential profit is $ 600, the risk-to-reward ratio will be one to three (1: 3).

It is recommended that you risk only a small portion of your total capital in each trade. In general, less than 2% of the total capital in a trade is reasonable, and more than 5% is a high risk.

How much capital will I set aside for the transaction?

For example, in the first month, I spend $ 1,000 a month on my trades. This amount varies for each person depending on the amount of individual capital. In the early stages of investing, it is better to invest less money in your trades and as time goes on and capital increases, you can increase this figure.

In which markets will I trade?

For example, I want to work in the forex and hard commodity markets because I know these markets best. [کالا‌های سخت به کالا‌های استخراجی مانند طلا، نقره، نفت و… گفته می‌شود.] Or if I have a lot of information in the field of technology and new technologies, I can invest in digital currencies.

How do I check my trades and performance?

For example, in the first step I start registering my trades. With each trade, I write down the points and review them every morning and summarize the month’s performance. Fractures and successes record the reason for the specific and emotional decisions I make about the deal every day, and I use my notes every three months to review my strategy.

Conclusion

One of the most important factors for a successful trade is having a good trading plan. A trading plan is a comprehensive and intelligent tool that guides the trader to make a profitable trade.

In this program, various factors must be considered. The trader’s motivation for entering a trade, the amount of time required to devote to the trade, the trader’s purpose of the trade, the profit to risk ratio, the capital required for the trade, the trader’s knowledge and skills in the market and finally the information of each trade are the most important factors. Good deals should include them.

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