The following article has been contributed by Prashant Sharma:
10 Steps to Building a Winning Trading Plan for 2017
Developing an effective trading plan is very important for any trader to become successful in his or her career. Before you start writing your trading plan, you should know some important points to be considered to formulate a successful trading plan which are listed here.
- Assessing your trading skills:
The first step in crafting an effective trading plan is to assess your technical skills and market knowledge. You can test your trading skills with help of a demo trading account and identify how good you are in predicting the market trends. This will help you determine your success ratio and key performance indicators. Without assessing your areas of expertise and trading skills thoroughly, you won’t be able to prepare a competitive trading plan.
- Asset Allocation:
Every trader has better knowledge in certain assets compared to others, because they would have traded certain assets over a long period and become familiar in predicting the price movement of those specific assets. Hence, you should choose the right assets based on your market knowledge and investment potential. Diversification of assets is very important for any investor to minimize the risks and to hedge against losses.
- Define Risk Tolerance:
Deciding the amount of risk you are willing to take is important part of your trading plan. Some investments like binary options have better risk/reward profile when compared to stocks or Forex trading. Also if you plan to use techniques like leveraging to increase your returns, you should also decide how far you are willing to risk your money before you start trading. You should always maintain a cap on the amount of investment in any particular trade and should adopt strict money management principles. Deciding the amount of risk tolerance is an important component of any trading plan.
- Deciding your Trading Goals:
You should also decide your investment goals clearly, before you start trading. You should analyze the risk/reward ratio of various asset classes and decide how much percentage of your capital you are planning to invest in each of them. You should anticipate realistic profit targets for each trade and make sure you plan your investment based on that. You should learn to use to stop/loss and other techniques to limit your losses. You should clearly set your weekly, monthly and yearly profit goals in terms of absolute value or as a percentage of your asset portfolio. You should also reassess your goals periodically and change it based on the present conditions. You should always have an economic calendar with you and choose your trading goals based on various financial events anticipated in current fiscal year.
- Money Management:
Money management is very important for any investor and it helps to limit your investment on any particular asset. When you decide on the assets to invest as part of your trading plan, you should also allocate a certain amount of funds for each asset class based on your profit targets and trading strategy. Never allocate your entire capital on any single asset as this will only result in losses.
- Decide Exit Criteria for each trade:
You should decide your entry/exit rules clearly as part of your trading plan. Exits are more crucial than entries as you should know when to come out of a trade once you have made certain profit. You should not be too greedy and end up with a loss. You can make use of technical indicators and signals to identify the trailing stops and decide your exit position for each trade in advance. You should decide the stop/loss position for each trade before you place any trade. This will help you to minimize your losses and avoid becoming bankrupt. You can also learn to use resistance/support levels to decide your entry/exit criteria. Also, every trade must have a clear profit target so that they can exit the trade accordingly.
- Choose the Entry Criteria for each trade:
You should also formulate the entry conditions clearly in your trading plan in order to succeed as an investor. Generally investors trade strong stocks during an uptrend and weak stocks during the downtrend. You should plan the entry criteria for every asset category based on your previous experience and discussion with market experts. You should know when to use short and long positions for each trade and plot it as part of your trading plan.
- Fundamental analysis:
Before you start trading, you should also perform thorough fundamental analysis of various assets you are planning to invest in. If you want to invest in stocks, you should read the about the company’s quarterly results and also follow all the financial news related to that particular company. In similar way, if you plan to invest in commodities or forex currencies you should do some fundamental analysis on those assets before starting to trade. Only based on your fundamental analysis, you should allocate your funds and this is an important step in building an effective trade plan.
- Decide Trading strategies:
Trading strategies are very important for any investor in order to maximize their returns. There are various strategies like Trend-trading strategy, Swing strategy, Scalping, Hedging strategy, Co-integration strategy, Risk-reversal strategy etc. You should decide the trading strategy based on your trading style and how well it suits you.
- Choose your Technical Indicators:
Also you should choose which technical indicators you are planning to use as part of your trading strategy. A moving average is a commonly used technical indicator by traders who invest in securities. Some traders make use of complex indicators like MACD, Stochastic Oscillator, Momentum Indicator, Commodity Channel Index (CCI), Relative strength Index etc. You can choose whichever technical indicator works best for you and mention this in your trading plan.
If you want to become a successful trader, you should always have clear understanding of your entry/exit criteria and profit targets. You should also decide your financial goals, asset allocation and trading strategies as part of your trading plan in order to achieve maximum profits.