Whether you are venturing into stocks, commodities, or currencies, the skill set of trading is quite similar across the board. The same skills that are required to be a successful stock trader are identical to the skills you need to trade commodities. Of course, there is a host of market-specific knowledge that you need to gain, but that information does not really enhance trader performance. The battle is not with gaining superior knowledge and insight into the market, necessarily. Rather, the real key to trading success is generally understanding that trading is largely about battling ourselves.
Trading is a psychological challenge more than it is anything else, and one of the greatest keys to building a strong mindset that is conducive to trading success it so be a rigorous trade planner. This is essential. In this article, we are going to discuss the basic elements of a trade plan, why it is important, and how to write one.
Why?
A trade plan is essential because it helps you to approach the market with patience and a proactive outlook, two characteristics which are absolutely essential to trading success. Developing and writing out a trade plan will help you be clear-minded and less emotional when making trade decisions.
Key Elements
The basic idea behind a trade plan is to have a written account that details your forex trading plan of action. Therefore, it can contain whatever information you feel is essential in order to convey your ideas. Think of it like a battle plan. If you were going to invade a country, you would have a detailed plan, right? That’s what trading is like. Every time you enter the market, you are essentially invading foreign territory and hoping to leave with more than you came with! Just don’t get caught unaware by the enemy (buyers if you are a seller, or sellers if you are a buyer). The best way to make sure you are not caught unaware is to have a written plan detailing at least the following:
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What asset
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What price to enter
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How to manage exit
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What is setup
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Position size
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Etc
These are a few of the key pieces of information you want in your trade plan.
How To Format It
This can be done in various ways. Some traders will keep a physical notebook and write out their trade plan in pen. Others develop Excel spreadsheets or Word doc tables to capture the information, and others purchase trade plan software which can be very helpful in analyzing and tracking performance and other key pieces of information.
The truth is that trade planning is not the most exciting aspect of trading, and that is why most people do not do it. However, it is essential. If you choose to adopt and reinforce the thought that you want to plan your trades and you enjoy doing it because of the overall impact it has on your trading in general, then you will find yourself developing a more consistent habit.
Risk disclaimer: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite.