Two clicks and you’re rich. That’s what trading looks like to many of the traders that decide to have a go at the markets. But when you actually make a trade, it’s just not like that at all.
Trading is just like any professional activity that has the ultimate goal of achieving some sort of payout.
Those with experience always have a plan. Without it there is no foundation from where one can observe the market unfolding and by seeing what is happening – calmly, impartially – they can find the right time to act calmly and with precision.
Having a plan like this increases the odds in your favor and actually isn’t something terribly hard to do. The more experience you get, the more automated it becomes and lets traders track open positions at the same time.
These are the steps needed to create a trade plan.
- Define when to buy or sell
Number one on every trader’s trading plan. The parameters you need to have in advance are price level, timing and if an analysis – preferably Elliott Wave – to be pointing towards a certain action.
It’s crucial that the description of what caused a buy or sell is written down. This can be a text using informal language like “today I decided to buy EUR/USD because my Elliott Wave count is showing signs of a turn” or it could take a more structured form. You could use excel to write in the date and time, as well as the timeframe and direction. This written history will help you later on to compare different situations and might prevent wrong decisions.
- Take Profit and Stop Loss
Prepare these two in advance. Making decisions about how much you want to win and how much you’re prepared to lose BEFORE putting in real money in a trade is better because the emotions of trading having kicked in.
- Prepare for variations
You should prepare in advance for different scenarios once a trade is opened. It’s not uncommon for traders to open a position and see it immediately go in the direction they weren’t expecting. It could also linger in a range for a while making you nervous.
Prepare for these things to happen, think about what you should do if they do happen. That way you won’t be surprised or angered when they do. If you let anger, surprise and fear in your trading then you increase the chances of losing.
- The Unexpected
Prepare for the unexpected. Of course that’s easier said than done because it’s so ambiguous. But it all really comes down to your mindset (and experience).
Are you trading to make big bucks and drive a Lamborghini in two weeks’ time? Then the first sign of difficulty will scare you away after losing some money. Your mindset isn’t geared towards unforeseen events.
Are you someone that wants to take informed, calm decisions in what is a high risk environment without thinking only about the profits? You can already see the difference and who will have a better chance of winning.
These five steps can look like too much for someone just trading the markets but it couldn’t be further from the truth. All of them are parts of the everyday lives of investors and traders that do this for a living. They can’t afford to be sloppy or lack focus.