Imagine you want to build a house for instance.
The first thing you need in order to carry out your building is a well drawn-out plan that will guide the constructors on how to build your own house specifically. This plan will contain the specific dimensions and design of your house.
This is a good illustration to describe exactly what a good trading plan means.
Definition Of A Good Trading Plan
A good trading plan is a well-thought-out, documented and organized method of identifying potential trading opportunities while taking into consideration the conditions and objectives that must be met before taking any trade.
This plan must put in consideration the trader's personal style and goals.
Understanding A Good Trading Plan
As the popular English saying goes; "one man's food is another man's poison."
This saying is relevant because a good trading plan is always relative and varies from trader to trader. This is because, just as the fingerprint of every individual is unique to them, no two traders in the world are exactly the same.
However, a general rule that guides all trading plans is, good trading plans are built based on personal style of trading and goals.
The level of details written in a trading plan depends on the type of trader the person in question is.
Types Of Trading Plans
There are broadly two kinds of trading plans.
The categorization of trading plans under these two categories is dependent on how you make your investments. Theses are:
Automatic Investing and Simple Trading Plans
Automatic investing is a type of automated investment of a specific amount carried out by investors at regular intervals into majorly mutual funds and other assets.
However, while the process of investment is automated, the plan upon which the investment is made is clearly written and documented.
This plan enables investors to know when to get in, when to get out and what to do when the market moves against them.
As you can tell, since the whole process is automated and it is done at intervals which could be once in a month, once in a quarter or once in a year, the plan on which these investments are carried out would be simple.
Hence, the type of trading plan needed for this kind of investment might not necessarily be lengthy or too detailed, rather it would be simple and concise.
Tactical or Active Trading Plans
Tactical or Active trading plans are mostly used by the short-term and long-term traders.
In contrast to the automatic type of investment that is carried out at regular intervals, tactical traders (short-term and long-term traders) are in search of something specific in the marketplace more often.
For instance, when price gets to a specific support or resistance level or when price sweeps liquidity and then reverses or when price taps into a specific imbalance at a specific time or even when a particular chart pattern is printed on a specific time frame.
These are instances in which Tactical traders may look to get into their positions.
Since these types of traders require a lot of specifics before entering into any trading position, their trading plans must be very well detailed to tell them when exactly to enter a trade and when not to engage in any trading transactions.
Elements Of A Good Trading Plan
As you've learned earlier, no two trading plans are exactly the same. However, every good trading plan should contain the elements discussed in this section.
Every trading plan must include the specific goal or goals a trader wants to achieve from trading both short-term and long-term. The clearer the goal, the better.
This is because your goal will gear you up to learn to trade and then, you trade accordingly.
Time and time again has it been mentioned in this article that your trading plan should contain your trading style.
A trader's style of trading should be a reflection of their personality, way of life(the time available for you to give trading) and inclinations.
Their trading plan can include day trading, swing trading, position trading or long-term investments.
Trading strategy is a very crucial element that must be contained in every good trading plan because it is the roadmap that helps traders navigate their ways in the market. Their strategy outlines how they approach the market.
A trader must be clear on what type of strategy they use in entering and exiting a position. Oftentimes, this element contains their risk appetite, time of entry and exit.
Risk management should never be overlooked in any type of trading plan because it is what saves lots of traders from blowing up their account.
A trader must be specific on how much they want to risk per trade. This is relative and is dependent on how your trading strategy is.
A trader must be specific on how they want to manage their running positions. They can choose to have their positions opened until it hits either stop-loss or take-profit.
Some can choose to cut out partials as they ride their positions and others can choose to set trades at break-even when their profits get to a certain extent.
Other necessary elements include; emotion management, expectations from every trade, trade monitoring and the flexibility of amendments as experience increases.
In conclusion, a good trading plan is a crucial tool for any trader looking to achieve success in the financial markets. It provides a clear roadmap, helps manage risk, and allows for disciplined decision-making.
By following a well-crafted trading plan, traders can increase their chances of achieving consistent profits and long-term success in the exciting world of trading.