In this overview, we will take a look at how to prepare a trading plan. A trading plan helps a trader assess the current market situation, find and implement promising deals.
What is a trading plan for?
Trading plan Is a kind of trader’s “road map”. In it, based on the trading strategy used, the available trading opportunities will be considered and promising deals planned. Prospects are trades with a high probability of success, taken in the right place, at the right time, with moderate risk and good potential for profit.
A trading plan should describe in detail your trading ideas, analysis of the current situation. It allows you to capture on paper (or in a file) your view of the market. In general, the analysis and opinion about the market does not yet determine the success of a trade, but your beliefs at the moment will indicate an area for finding trading ideas.
Having a clear and understandable trading plan, a trader stops making chaotic emotional trades. Figuratively speaking, he is no longer dangling like a chip on the waves at the behest of the market. He sets the sail, and begins to purposefully move towards profit, finding and making promising trades. Thanks to the prepared trading plan, the trader’s trading efficiency increases.
Preparing a trading plan
The preparation of a trading plan can be divided into several steps: a technical picture, fundamental factors, additional signals (indicators), risk control and profit taking. Active traders draw up a trading plan for each day. In the morning, a trading plan is drawn up and implemented during the day, with possible adjustments and additions.
Step 1. Technical picture
Good old technical analysis is usually used to assess the technical picture. You need to open the chart of a financial instrument, examine it on different timeframes (starting with the older ones and ending with the lower ones), and mark all the significant factors on it:
- Trend direction, trend lines.
- Support and resistance levels.
- Technical analysis patterns.
- Additional signals: Fibonacci levels, candlestick combinations, Price Action patterns, various author’s techniques.
After the chart is marked, you need to find suitable entry points for your trading strategy on it. Determine the signals on the basis of which the position will be opened: a breakout or rebound from a strong level, an exit from the price range, a formed technical analysis figure, and so on. Mark all entry points and confirmatory signals in the trading plan.
Step 2. Fundamental factors
The main “engine” of quotes on the market is the release of news that is important from the point of view of fundamental analysis, for example: decisions on interest rates of central banks, publication of macroeconomic indicators, speeches by politicians, etc. It is the news that comes out that provokes an increase in volatility in the market and set the direction for movement quotes.
In order to know when and what news are released, you need to use the economic calendar. We open the calendar in the morning and mark when significant news comes out during the day. After the release of strong data, a signal may be formed to open a position according to a trading plan, this is the basis of the principle of news trading. Or vice versa, it will be necessary to close a profitable position or minimize risks (by tightening the Stop) before publishing the data.
Step 3. Indicator signals
To date, a large number of different indicators have been created that help traders to carry out a comprehensive analysis of the market. Trading indicators are mathematical functions based on price or volume. They not only help to analyze the market, but can also give trading signals directly. Some indicators work well in a trend, some in a sideways trend, and there are universal ones.
Typically, traders use indicators in addition to technical analysis. They can give confirming signals for opening a position, determine the direction of the trend, and serve as a guide for setting Stops and Profits. We mark in the trading plan the indicators and signals used that will be used to open or close positions.
Step 4. Determine Stop and Profit
To limit your risk in trading, you need a clear plan for closing losing positions and taking profits. When the market moves against your position, Stop Loss and Take Profit orders act as insurance, limiting losses and protecting profits. Therefore, when planning a deal, it is necessary to note where the technically competent Stop will be set, and by what criteria the Profit will be fixed.
The ratio of Stop to Profit is very important; it can be used as an additional filter for selecting deals. With a 1: 1 ratio, it’s worth considering twice whether to close the deal. It is better to choose deals with a ratio of 1: 2 or more. These will be promising trades – in which the potential profit (Profit) is several times higher than the possible loss (Stop).
Trading plan execution
After preparing a trading plan, you should form a whole picture of possible actions on the market: where and on the basis of what signals you are ready to open trades, what news can affect the price dynamics, where to place a Stop, where to fix Profit. It looks like this:
- Financial instrument, current trend.
- Signals (technical analysis, news, indicators, etc.) to open a position.
- Entry point, direction of trade.
- Risk control – where to set the Stop.
- Where (or when) to fix the Profit.
Further, the trader must strictly adhere to his trading plan. If there is a signal to open a deal, we enter the market; if there is no signal, we sit and wait, do not enter the market. The discipline of the trader plays an important role here, it is not enough just to prepare a trading plan, you still need to execute it exactly. Knowledge of the basics of trading psychology can help you with this.
Trading plan adjustments
During the day, depending on the dynamics of the quotes movement, some adjustments to the plan are possible: additional signals may appear, or vice versa – the previous ones will become irrelevant. This is a normal practice, the market is influenced by various factors, including the publication of macroeconomic indicators. We make the necessary changes to the trading plan and continue to strictly follow it.
At the end of the day, all transactions and their results will need to be recorded in the trader’s trading diary. With its help, you can see if the trading plan was followed, or the trades were made at random. Also, in the future, it will be possible to evaluate statistics, find weak and strong points in your trading system and, if necessary, make adjustments.
The trading plan is the main tool, the weapon of the trader. With its help, the current market situation is assessed, promising transactions are planned and implemented. With a prepared trading plan, a trader protects himself from chaotic emotional trades. The disciplined drawing up and execution of a trading plan is the way to improve trading efficiency and become a successful trader.