Trading plan — the What, the Why, and the How
If you fail to plan, you are planning to fail! — Franklin
Always have a plan.
In almost all aspects of your career and life, a plan helps you advance towards your goals and achieve them. It also sets a roadmap of what to do and, most notably, what not to do, with the end goal being: achieving the objectives you’ve selected.
The above is equally important in your financial career: trading and investment specifically.
Having a trading plan is one of the most important concepts a new trader should familiarize him/herself with.
A trading plan is a blueprint at the disposal of any trader or investor that allows them to identify how to trade. In our field, research before trading and investing is more important than the act of execution.
The plan is written down (very important) and is followed until it no longer meets its objective: making money.
Set goals first
When drafting your trading plan, it’s essential to set your goals firsthand.
It would be best if you molded your plan around your goals and not the other way around.
So if you’re a day trader, your trading plan will be very different than a seasonal investor.
Capital, risk tolerance, trading frequency, exposure are examples of variables that can affect how you approach your plan.
Risk Control
Many traders end up losing a lot of money, especially at the start of their trading careers.
One way to mitigate this and adequately control your losses, you could set a strict percentage of your whole balance for every trade as risk.
Another would be to not minimize your position size by a certain percentage on every consecutive trade lost: let’s say your position size is 100,000$, and your risk is at 1%. You lost (which equates to 1,000$), and you want to jump back in. Your trading plan dictated that instead of losing 1% on your next trade, risk should be decreased by 5%, decreasing the risk of your next trade from 1% to 0.95%.
Trades and Performance Review
When you stop learning, you stop growing — Blanchard
Trading is a never-ending learning journey. Hence, reviewing your trades and the markets on a daily, 3-days, or weekly basis is very important.
Set some time, depending on your style and trading frequency, to analyze the market, review any mistake you might have committed, reflect on the trading decisions you’ve made, what you could have done better, how you can refine your strategy (if it needs refinement), and so much more.
Document everything in a trading journal.
Time spent educating yourself and being reflective on past actions will translate into better trades in the future.
Effort-To-Reward ratio
Determine how much work you’re willing to put in analyzing the market and researching the assets you’re interested in.
Also, set a day where you would analyze the global market in its different sectors: commodities, forex, and stocks. Try to do a cross-analysis to spot the wave the current traders are on.
You can set a specific time per day to study the charts you’re interested in or explore new ones that might provide you with an excellent opportunity.
The more you trade per month, the more you need to invest on-screen time. It’ll be worth it.
Some considerations when constructing your trading plan
Only risk 1 to 2% of your capital
Most traders enter a trade without defining their risk. Leverage and position size are all irrelevant if you’re not strict about how much you’re willing to lose per trade.
A good rule of thumb would be to set your risk to 1% of your capital. In other words, no matter what trade you take, on whatever asset, your risk and your loss should not exceed 1% of your portfolio.
Only then could you set your position size.
Leverage or no leverage
Your trading plan should also include whether leverage is allowed or not.
Rule of thumb: if you’re starting out, STAY AWAY from leverage and Leveraged tokens (BULL, BEAR tokens if you’re in crypto).
Leverage should be used as a risk management tool first and foremost. Until you learn that, it would do you wise to remain in spot trading.
Trading restrictions
Trading restrictions on when a trade goes wrong can prove to be beneficial to you in the long term and will prevent you from falling into a destructive behavior in an effort to regain the losses you’ve encountered.
But trading restrictions don’t simply apply to the losing side. If you’re on a winning streak, then you would fall into a different and more dangerous kind of trap: the over-confidence one.
You’ll feel more comfortable taking trades. You’ll up your risk and trade more, and it would be hard to distinguish in this case between cheer luck and actual skill.
Taking a time-out and restricting yourself from trading in both of the above scenarios will help you become a better trader.
Asset allocations
Asset allocation is an important concept that you should familiarize yourself with, and it’s deserving of its own content to thoroughly explain the concepts behind it. But simply put, it revolves around setting rules on what percentage of your portfolio should be invested in different industries or different aspects of a space.
For example, No matter at what stage your portfolio is, you would like to have: 40% fiat, 20% in BTC, 20% in ETH, 20% equally divided between your favorite long-term bags. You can even split the last part into Defi, Oracles, etc.
Another example: 40% fiat, 40% split between Gold, Platinum and Silver, 10% in Bonds, 10% in stocks
The possibilities of splitting your portfolio are endless. You can split it between multiple industries and markets or split it within the same market like the first example.
Blueprints are Meant to be Followed and Adjusted
Blueprints are meant to be followed to the letter. And so is your trading plan.
When constructing your trading plan, a lot of research and thought should be poured into the process. In other words:
Don’t take it lightly!
Everything you put in the plan should help you navigate the waves of the market, regardless if those waves are with you or against you.
When would you adjust your trading plan?
You would adjust it when it’s no longer making you money over a period of time (and not a single or couple of trades). When doing your performance review, and depending on what you’ll find, you can adjust your plan at your own discretion until you feel it works again. And then you put it in motion and re-assess again in a few months.
A word of caution: adjusting your trading plan should come after you’ve tested it for an extended period of time. In other words: one losing trade doesn’t equate to a failed trading plan.
Importance of keeping a trading journal
Keeping a trading journal will allow you to better hold yourself accountable, as well as allow you to track your trades and performances. It’ll also help you keep yourself in check.
You can keep your trading plan inside. You can track what’s working and what isn’t working there.
I’ll be discussing this in another article, so stay tuned!
Conclusion
- Trading plans are meant to provide you with guidelines and act as a compass when you’re unsure of what to do,
- Trading plans are highly dependent on your goals, and should be tailored to your own objectives and personality,
- Put some time in writing up your trading plan, it’ll be worth it
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