How to Create a Successful Trading Plan

Start opening positions on FX, indices, commodities, shares and cryptocurrencies with a successful trading plan in place. We show you how to create a trading plan which prepares you for market volatility.
What is a trading plan?
It will help you decide what market you want to trade and can function as an essential decision-making tool. The trading plan you create should be specifically suited to you rather than a generic one – you don’t want a copy of a plan with different goals in place to the ones you had in mind.
There are many useful things we think you should consider when creating your plan including:
- Why you want to start trading
- How much time you want to spend trading
- What’s your risk appetite
- How much money can you trade with
- What are the markets you want to trade
- The different trading strategies you will use
- How are you going to record your trade
Why is having a trading plan important?
The process of trading will become seamless as all the planning has been done. You can then feel confident in trading with the parameters you have set yourself. Once you make the plan make sure you stick to it.
Having a plan will cut emotions out of making important trading decisions. You will have already pre-defined the point at which you take the profit and also when to exit a trade.
You will establish discipline when trading so sticking to your plan is important, by doing so you will be able to record what trades work for you and which ones don’t.
Keeping a plan will help you learn from mistakes as you will be able to learn from past mistakes where you might have made the wrong judgement when making a trade.
Now it’s time to create your trading plan, just follow these simple steps!
Write down why you want to trade
Think about the motivation behind you wanting to trade, as well as the time you want to (and are able) to put aside. After this write down what you want to achieve from trading.
Decide on the time you can put aside for trading
You will have other commitments which may take top priority before trading. Will you have to manage your trades at certain points during the day or do you have the ability to dedicate longer periods of time towards trading?
If you want to make trades consistently throughout the day then you will need more time to do so. If you are planning to use stops and limits to manage your risk then you won’t need to monitor your trades throughout the day.
Write down your trading goals and objectives
Your trading goal needs to be specific. You should also make a goal which can be measured as well as one that is realistic. An example could be ‘I want to increase the value of my trading portfolio by ‘x’ amount in the next 6 months’. This goal is both attainable and realistic you have also set yourself a time period to try and meet this goal.
Before you enter the financial markets you should try and figure out what sort of trader you are, as well as looking closely at your risk appetite.
Below are four main trading styles to consider when assessing risk appetite:
- Position trading – Opening a position and holding it for weeks, months or even in some cases years. This is only for traders who expect to make a profit in the long term.
- Swing trading – Positions will be held over several days or weeks, this is for traders who want to take advantage of medium-term market moves.
- Day trading – This is for traders who can put more time to one side as this requires opening and closing a small number of trades throughout the day. With day trading you don’t hold any positions overnight, which ultimately eliminates any overnight fees and risk you may come across.
- Scalping – This is for traders who want to make a number of small profits with the intention of it leading to a large amount. Swing trading involves placing several trades throughout the day.
What’s your risk-reward ratio?
There is always a risk attached to trading the financial markets and some traders may take on more risk with the intention of making a larger profit. This is dependent on the trader and the situation. Traders calculate the risk-reward ratio and this is normally 1:3 or higher, which means the potential profit will be double the amount of the potential loss that could be made when placing a trade.
To do this you just need to compare the amount you are willing to risk to the potential gain of the trade. If you are risking £200 then the potential gain would be £500. The risk-reward ratio, in this case, would be 1:4.
Figure out the amount of capital you are able to trade with
You should never risk more than you can afford to lose. Trading comes with risk and you may end up losing more capital than you initially thought. Make sure you have enough money to cover maximum potential losses.
Study the market you want to trade
Each market differs so your trading plan should cover the specific market you want to trade on. Look at the existing knowledge you have on each market and consider factors that can affect that particular market. Have a look at our market insights to learn about the different asset classes.
Start a trading diary
You should also keep a trading diary as this is an effective way of recording your trades. This is more about your thought process whilst trading, the emotions you face as well as the reasoning behind any important trading decisions you make. For every decision, make sure you write down why you decided to do that – this eliminates emotions in the future.
Trading on margin is high risk.