A trading plan and the main components for its creation.

/The article is intended for novice traders. More training materials can be found here: https://www.varchev.com/trading-uni.htm. /

What is a trading plan?

A trading plan is a comprehensive decision-making tool in trading. A key element is to clear the emotional factor and approach the activity professionally. The plan must be your own, an external analysis or a combination of analyzes can be used, but from there playing out the analysis is strictly individual.

Steps to create a trading plan:

The time that can be devoted to trading

Estimate how much time you can realistically spare. Can you trade while at work or do you need to manage your trades early in the morning or late at night? If you want to make many trades per day, you will need more time. If you have a long-term passive strategy, you may not need many hours per day.

It is also important to allow enough time for preparation, which includes studying, practicing strategies and analyzing the markets.

Trading Strategy

Determining the style is the basis for the development of the plan. What kind of trader you are and what time frame you will trade on is based on your personality, your attitude to risk, as well as the amount of time you can devote to trading.

Defining objectives

Each trading goal should not be just a quantity, it should be specific, measurable, achievable and time-bound, i.e. relative to current performance, what is the real opportunity for equity growth on a weekly, monthly, quarterly basis.

Risk / Return

One of the most key factors in risk management. Before you start trading, consider what risk you are willing to take – both for individual trades and for your trading strategy as a whole. Determining your risk limit is very important. It is recommended, especially for more inexperienced traders, that the risk is reduced to 1% to 3% of the capital, but again this depends on the trading style. While for medium-term trend trading 1% may be a bit low, for a scalper it may be too much risk.

How much trading capital

See how much money you can afford to spend on trading. You should never risk more than you can afford to lose. Trading involves a lot of risk and you can end up losing all your trading capital.

Do the math before you start and make sure you can afford the maximum potential loss on each trade. If you don’t have enough trading capital to start right now, practice trading on a demo account until you get the capital you need.

Trade Journal

For a trading plan to work, it must be backed up by a journal to record winning and losing trades. This is essential in the long term for clearing trading errors and building additional rules. Not only should you include the technical details, such as entry and exit points of the trade, but also the rationale behind your decisions (analysis) and emotions. If you deviate from your plan, write down why you did so and what the result was. The more details in your journal, the better.