Any new venture requires research and planning. Trading is no exception, but unfortunately, many people jump in unprepared so that their trades are little more than gambles. If you want to become a successful trader, you must have a trading plan. Not only will it help you understand when to place trades, it will tell you know when to exit a trade, manage your risk and help you keep emotion out of your trading. It is important to invest time into researching and developing a plan that will work for you before you begin. Trial the plan, analyze its successes and failures and modify it as necessary and you will be more likely to have success in the future.
Set Your Goals
Before you can create a trading plan, you must set your goals. Take a piece of paper and pen and write them down to make them more concrete. You need to take into account your personality and your trading style in order to be able to set realistic and workable goals. Assess your strengths and weaknesses and how they will impact your trading. Include timeframes when setting your goals so that you have daily, weekly, monthly, bi-annual and annual goals. All of this is the first step to planning your actual trades.
Plan Entry, Stop and Profit Targets
By planning when you will enter a trade and when you will exit a trade, you avoid trading by emotion. Knowing when to exit a trade is just as important as understanding the signals of when to enter the trade. Exiting in time helps you manage your bankroll and will allow you to come back to trade another day. Setting these points forces you to plan a logical strategy and helps you stick to your strategy when you are trading.
Decide on Risk:Reward Ratios
You must plan your risk:reward ratio once you have already set your entry, stop and profit targets. The higher the ratio, the more reward you will have compared to risk and therefore, the more appealing the trade will be. A ratio of around 1:1.5 would look good. As part of this, you need to work out your risk in terms of how much of your capital you can risk on any one trade or in any one day. The amount will depend on your personal risk tolerance, but is typically between 1% and 5% of your total capital.
Keep records of everything. Of your plans, of your analysis, of your risk levels and targets, of your trading records and of your charts. These records allow you to go back and analyze the success or failure of your trade. From this, you can sit and tweak your plan, improving it as you go.
The key to trading successfully is planning your trades wisely. This will be different for each person as goals and personality vary between people. However, planning, recording and modifying your plans are the key to becoming a successful trader.