A trading plan is a compass or map that guides any trader to success. A professional trader has a complete trading plan where he explains and details when, how, and why he will open a trade.
You also know how much you are willing to risk daily, weekly, or monthly, how much money you are going to risk entering a trade, what indicators need to be considered for a potential entry. How you will manage your positions and even identify times it’s not ideal to trade.
In this article, we would explain what elements a complete, winning, and professional trading plan must have so that you can create yours.
What is a trading plan?
A trading plan is a set of guidelines that define trade operations. It tells you how to act against a series of predefined guidelines, which allows you to test and estimate results.
It’s like the business plan for a new company. It is important to keep in mind that to make profits from binary options it is not enough to have a winning strategy, but also be able to describe the said strategy in the form of a method, with clear entry and exit rules and risk management
In binary options trading, a trader should tend to the coldness of not falling into any type of emotional instability, but instead being totally strict with the trading plan. The ability to resist all emotional temptations is the key to consistent and lasting success.
Why is it so important to have a trading plan?
The main idea of having a trading plan is to have a set of rules to follow. Once you have these written rules, it is much easier to put them into practice, since you have a clear action plan for your trades.
A good trading plan can help avoid spontaneous and irreversible decision-making, something that is especially useful when emotions start to come into play.
The trading decisions you make are part of your trading plan with a predetermined goal. Therefore, having rules to follow that eliminate any subjectivity in your operations allows you to better manage your emotions.
Your trading plan must contain the maximum number of trades you plan to take per day, to avoid over-trading, and going over this is simply breaking the rules.
It’s important to have a trading plan but it’s also very important to keep the rules sacred.
What you should keep in mind before starting your trading plan
As a trader, you must create your trading plan where you define your goals and be able to achieve them. You must bear in mind that the trading plan must pursue the following objectives:
Establish rules to follow: you must develop a series of ideas to embrace throughout your trading journey.
Carry out better analysis of the market and minimize errors: it can prevent you from making spontaneous and irreversible decisions. This usually happens when you act in haste or emotion.
Finding the best entry and exit points in the market: you must know what trade to take during the trading session, depending on the scenarios that arise. For example when a piece of high volatility news is released.
Help manage emotions: the decisions that you make are part of a trading plan template and have a previously determined objective.
Avoid over-trading: traders can make spontaneous trading decisions, these decisions will in all likelihood lead to losses that the trader will try to recoup with more trades, sometimes even with a higher trading volume. Over-trading leads to losses and losses lead to wanting to recover what was lost. This is a tremendous mistake.
Help manage your risk: If you decide to open a position with a risk higher than the risk defined in your trading plan (1% -2%), including it in your trading plan helps you manage your other open positions.
How to make your Trading Plan
The only way to be successful in trading consistently over time is to work with an established trading plan.
To develop it, you have to consider these things:
You must take into account how much time you can dedicate to trading and what type of trader you want to be, and based on this, you can define your time and the type of trades that you are going to carry out (intraday, swing trading, etc.).
2. Initial capital
You should take your trading capital into account; by considering this along with your objectives and goals, you will be able to decide how much you’re risking per trade and from that be able to predict how much you can earn per trade.
3. Market Type
When selecting the market in which you are going to trade, you need to bear in mind that there are several types of financial products, the most common are: Futures, Forex, Stocks, Options, CFDs, ETFs, Commodities and Value Network focuses majorly on cryptocurrencies.
4. Money Management
For all types of traders regardless of which market you are trading, money management is extremely important. Your money management principle indicates the number of option contracts you can enter in order to maximize profits while minimizing losses.
5. Risk exposure
The risk assumed in each trade is variable for each investor and will be established taking into account the amount of capital available to trade with. However, it should always be within the limits indicated below:
- Daily: 0.5-1%
- Weekly: 1-3%
- Monthly: 5-10%
6. Trading Strategy
In this section, you are going to simplify your trading strategy as if you were going to explain it to a child. It details how an opportunity to enter the market occurs, maximum loss per trade contract, what are the risks and opportunities of the strategy, requirements to determine a good investment opportunity.
If possible, attach images of trades you have taken, by doing this you can always keep in mind what the trading opportunity looks like.
7. Track record and periodic evaluation of results
It is essential to keep a detailed record of your trades, which allows you to evaluate results periodically.
A Track record is a record of all your trades and can be made in a spreadsheet application, where you record: the type of contract, the strategy used, profit or loss result, the number of contracts entered with each order, and the profit target.
The record of your trades allows you to constantly re-evaluate the effectiveness of your strategy, if you are maintaining good results and if you are adhering to the trading plan.
Trading the financial markets can be a very stressful job. A trader who rigorously follows his plan in the market is less exposed to this stress. This is because the surprise factor is limited.
When you have a trading plan, you can measure, identify problems and failures, and make corrections instantly.
By having a plan, you are reducing the chances of losing trades.