A recent report by European Securities Markets Authority (ESMA) found that more than 90% of all people who start trading fail within a year. Most of them fail because of several reasons. For example, some fail because of their lack of understanding about how the financial industry works. Others fail when they rush to trade without taking time to study and develop their trading strategies. Others fail because they trade without having a plan. Here is an easy way to develop a good trading plan.
First, you need to know the type of trader you are. There are four main types of traders who include: scalpers, day traders, swing traders, and position traders. Scalpers open trades and close them within minutes after their target price is reached. Day traders on the other hand open trades and close them within a few hours while swing traders’ open trades and close them within a few days. Position trader open traders and close them within a few weeks and even months. As a trader, you need to know the type of trader you are, and create a plan based on that.
Second, you need to design a trading system. This system will guide you identify good entry and exit points. To do this, you should first identify the assets that you will be trading. You should avoid the temptation of trading each asset provided by the broker.
Then, using the timeframe you identified above, you should find the indicators to help you identify a trend and then find the indicators that will help you confirm the trend. Trend indicators like Moving Averages can help you identify a trend while oscillators like MACD can help you confirm a trend. Next, you should define your risk. A key rule is to always risk less than 5% of your funds per trade. To do this, the stop loss and take profit features will help you.
Third, after designing the trading system, you should now build it. To do this, you should identify the timeframe you will use in your trading. Then, you should identify the entry triggers and the exit triggers. For example, you design your trading system as follows. In a daily chart, you will use double moving averages of 14 and 28 timeframes. You will also use the stochastic and the RSI indicators to confirm the trend. In this, your long entry rule could be when the 14-day MA crosses the 28-day MA, the two Stochastic lines are moving up, and the RSI is above 50.
Fourth, after deigning and testing the system, you should now create a trading journal. This is a physical or digital document that journalizes everything you do. The journal should have several columns including the date, the time when you open a trade, the asset you buy or sell, the reason for opening the trade, the day and time you close it, the profit or loss of the trade, and the reason for closing the trade. It is easy to overlook the importance of a journal but, history tells us that people who use it are more successful. To this date, Warren Buffet, who has invested for more than 30 days uses one.