How to Build a Successful Trading Plan

In Continuation with Previous Article 

Prepare for trading

Keep your trading area distraction free because distractions can be costly in the trading arena. Whichever trading program you use, label the major, minor, and resistance levels and set alerts that you can easily see (or hear if you use an auditory signal).

Set exit rules

Your exits are far more important than your entries. (See the next section for a discussion of entries.) Many traders devote 90 percent of their attention looking for buy signals and almost no attention to when and where to exit — this is a mistake. Traders cannot sell if they are down because they don’t want to risk taking a loss. You need to overcome this thought process or your trading will be short lived. Professional traders commonly lose more trades than they win. However, by limiting their losses and effectively managing their money, they still earn a profit.

Know where your exits are before you enter a trade. Every trade has at least two exits. Also, before you enter a trade, write down what your stop loss amount is if a trade goes against you. Profit targets for each trade are optional as market conditions change that regularly. Remember with any trade never risk more than a pre-set portion of your portfolio.

Set your entry rules

You want your trading system to be just complicated enough to work but simple enough to enable you to make snap decisions. For example, an entry rule might say, “If signal C fires and the minimum target is four times as high as the stop loss and you are at support, buy x number of contracts or shares.”

If you have 15 conditions (many of which are subjective) that need to be met, it will be nearly impossible to actually make trades. More than half of al trades that occur on the New York Stock Exchange are generated by computer programs. This is because computers are better traders than humans. Computers don’t have the emotional component involved in trading decisions. With computers, each trading decision is based on probabilities. Computers make the trade if the trade meets certain set conditions.

Keep good records

Good traders always want to know why and how they win or lose a trade. Keeping good records helps you recognize what goes into a successful trade. They also prevent you from repeating mistakes. Your trading records should contain the following information:

  • Targets
  • Entry of each trade
  • Exit of each trade
  • Time
  • Support
  • Resistance levels
  • Daily open range
  • Where the market opened and closed for the day
  • Notes about the trade and what you learned

Your trading records need to include as much detail as possible so you can analyze the information you recorded about the trade. This report lets you evaluate the profit and loss for a particular system, average time per trade (important for calculating trade efficiency), draw-downs (amounts lost per trade based on a trading system), and other factors that help you see the overall picture of your trade so you can compare your information to a buy-and-hold strategy. Think of this report as you doing accounting for your business.

The post mortem

It’s important for you to keep a trading journal to write down your assessment and conclusions of a trade. At the end of the day, knowing why and how the trade went the way it did is more important than calculating the profit and loss which is nothing but a by-product of your processes.

The bottom line

Before you begin trading a new system, be sure to test your preparation by doing paper trades for at least the first month or two but not too long as nothing beats real market trading experience and having real risk capital on the line. This process doesn’t guarantee that you will have immediate success when you start trading real money, but it will help boost your confidence that the system you use will actually work. It is more important to gain skill in making trades without hesitation than it is to decide on a trading system.

Your chances of winning in the market are based on your level of skill and your trading system. Nevertheless, you cannot expect to win without losing. Skilled traders will not enter a trade unless they know that the odds of winning are in their favor. Skilled traders will always lose some battles, but if they cut their losses short and let their profits ride, they will win bigger than they lose.

Treat your trading efforts as a business and you will survive in the trading game. Successful traders who win consistently do this. Your next step is to create a concrete trading plan using what we have discussed in this tutorial.

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