The trading plan is a way of identifying opportunities in the market. It is an outline of your trade that helps you decide when and how much to trade. A trader who builds a precise plan and follows it is more likely to keep a level head, i.e., fewer chances of making big mistakes.
How to build a trading plan?
Here are six steps to help you know how to create a trading plan:
- Set your goals: What are you expecting to profit from this trade? 10% or 30%? Always set goals based on reality, do not have high hopes. If you are new at this, it will be good to start with smaller goals, then increase your goals once you become compatible. Focus on obtaining experience first.
- Set your risk limit: Only you know the answer to what’s your risk limit. Before you trade, estimate how much of your portfolio you are prepared to risk on a given trade. Most of the traders do not risk more than 2% of their portfolio. If you have a small amount in your portfolio, you may choose to risk more to earn a better position, or you may consider risking less to try to secure your approach and avoid rushing through.
- Research thoroughly: Before you go for any trade, research thoroughly about the given trade. For example, scrutinize the stock markets, analyze the stock market, plan what stocks to buy, and research the stocks to buy in India.
- Outline your entry and exit: Most traders make the mistake of concentrating only on how and when to enter a trade but pay very little attention on when to exit if things go south. Determine what buy signals will be your sign to enter a trade and enter into a trade when you are sure about the buy signals. Also, plan exit trades, concentrate on what you will do if a trade starts going down, and learn to trade and accept losses.
- Write it down: Always keep notes of your plan. Once you have written down your plan physically, it will give you a sense of responsibility. Reviewing your trading plan can help you to be responsible and accountable to take on to the markets.
- Review your trade: After making your trade, consider how the trade went. Keep your records from your plans and how your trades come about in a journal that will help you give insight into what went right or wrong, which will help you improve your future trade plans.
How to create a plan that works for you?
Whatever the trade, always remember to set reasonable goals and be ready to bear losses if things go south. It is very important to create a trading plan and stick to your trading plan, make profits when possible, and take the exit while you can. This also includes exiting at a loss to minimise the losses if need be.
While learning to how to buy stocks is a good skill to acquire, it is also crucial for retail investors to take professional advice to ensure that their financial plan is effective to reach their long-term goals.