How to create a plan of action for all the steps surrounding a trade
Huge profits and incredible prediction skills swirl around the mind. Easy pickings by hardly lifting a finger. That’s how trading is seen by many, but for better or worse it’s just not like that. Similar to almost any activity and profession that is performed to gain money, trading requires research and planning.
Traders who have experience always prepare their plan in advance, setting up a foundation from which they can observe how the market unfolds and react with a higher degree of calmness at the correct moment. Having such a plan improves chances of profits and setting it up isn’t that complex once you get the hang of it. In fact, with more and more experience, it can become an almost mechanical action and be done for consecutive or simultaneous trades. Here are the steps to prepare this plan.
Identifying conditions for buying and selling
This is the first thing that has to be written down in your trading plan. But there is a distinction between your trading system and the trading plan – the system is for identifying general conditions and circumstances in which action should be taken. In the context of the plan it refers to the particular conditions of the trade you’re about to make – its price, timing, if it crossed a support or resistance level, etc.
It’s of great importance to describe your buy and sell triggers. You can write it in a free text or cover a checklist that include any factors that have influenced you to pick the instrument, timeframe, indicator and direction. Having a written record at this point provides invaluable evidence of your thought patterns and can reveal your own mistakes later on.
Stop Loss and Take Profit levels
Having these prepared in advance is what gives you guidelines. Preparing them calmly and without real money put in a trade usually lets you calculate them more precisely. It doesn’t really matter how you make the calculation – manually with setting the distances on your gut feeling or by some formula. Acting on them in a disciplined manner is what is most important.
You should be prepared for any event before you make your trade. The price might change rapidly in the opposite direction, or move quicker than expected in line with your prediction. Or simply stand still. For all of these you have to know what your actions are. Should you exit, invest more, take out a part of the amount or anything else – if you know this in advance, it not only reduces stress but the risk you take on.
Anything that doesn’t fall in the previous categories can be included here. Market conditions, actionable quotes from top investors or central bankers, economic indicator levels, etc. Sometimes the most vital information can be found here.
Preparing all these steps can appear too much for many, but it can be the difference between success and failure. Over time you’ll be able to perform and write them quite quickly and gain the ability to act immediately when the time is right. The records of these plans can also be combined with a trading diary.