Importance of a Trading Plan
Great ideas involve planning as it is a vitally important step to succeed. Having a plan structures your strategy on how to make your dreams more attainable. Likewise with a trading plan, it is crucial to your success as a trader as it gives you a blueprint on how to play the market and triumph in it. Here are four reasons why you need to carefully plan your strategies before getting involved in the world of trading.
Keeps your emotions in check.
Trading can be a mental and emotional rollercoaster. With the real-time market volatility, it’s easy to succumb to trade aimlessly like buying a hot stock which suddenly sharply drops, then holding on to it with hopes that it will eventually bounce back. Hence, sticking to your trading plan, which spells out your entry, exit, and risk management methods, is key to keep you on track. It also keeps in check your emotional and mental state so you know what to do no matter how the market pans out.
Gives you a structured approach to the game.
If you are just starting out as a trader, it’s imperative that you define the following (1) Instruments to be traded, (2) What you want to get out of trading, (3) Holding Period, (4) Risk Tolerance (5) When and How to enter a position (6) When to exit a losing and winning position. Outlining these items will give you a strong foundation and boundaries to operate within.
Tells you when to step on the gas or brake pedal
There’s truth to the saying, “Cash is a position.” Essentially, a trading plan serves as a framework that will guide you through the entire trading process. Despite being bombarded with news, tips from friends, and countless noise out there, you can be unbiased on when to be aggressive and when to stay on the sidelines by just sticking to your back-tested trading plan.
Your blueprint to trading success
Your trading plan is the culmination of what you’ve learned in trading. It is something that you can look back and adjust when something didn’t pan out within expectations, bettering your approach when the same trading opportunity presents itself.
It’s one thing to have a trading plan and it’s another thing to follow it. When you have a trading plan in place, at least you’ve solved one part of the equation already. Next is the mastery of emotions.
