How To Create A Successful Trading Plan

Some people say that trading takes nerves of steel and insane willpower.

Maybe people with these traits and skills exist, but to become successful at trading you don’t need to have such rare superpowers. 

What a successful trader needs and what many traders fail to create is a solid plan.

Therefore, we will go through some simple, yet important points for creating an effective trading plan.

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All great trading plans have solid rules in these three areas:

  • Risk Control 
  • Profit-taking
  • Trade Entry

First, a great trade plan must be easy to understand.

If a trading plan has easy-to-understand and logical rules, a trader will follow and trust the rules.

For instance at MarketGauge, when it comes to risk control we like to risk 1-2% of a total account on any given trade.  This means if you have 10 active trades and the market falls apart, the most you could lose is 10% based on 1% risk per trade. A trader should also expect to make a certain amount of profit from each trade.

In general, a trade should make at least double the risked amount. Therefore, if you risk $100 you should at least expect to make a profit of $200 or more from that trade.

Additionally, every trade should have a specific reason for entry.

This can be up to interpretation and is based on an individual’s trading style. Some traders like to buy breakouts, while many like to take reversal or pullback trades. 

Either way, a trader should create a list of criteria for entering a trade. This will help them quickly decide if the trade is worth taking or if the chart pattern is forming an entry signal. 

With that said, creating a solid plan is the key to having nerves of steel, as it allows a trader to follow logically sound rules that take the personal bias and fear out of trading. 

Negative emotions in trading are empowered by unknown factors, and that’s what a solid trading plan aims to fix. 

As far as today’s action in the market, the rules just stated apply for sure, but even with these rules, one must understand why the market falls so hard and have some context for getting involved from the long side at all.

Here is Mish’s final tweet of the day:

“The last time I was this light equities was end of January 2020-for what that is worth-we bought bonds while the market dropped 40%-then we saw the now hackneyed phrase “dip” to buy-if you are buying dips now, please have some context.”

Watch Mish give market insights on Cheddar News! –> Cheddar News 9-20-2021

Twitter: @marketminute

The author may have a position in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author and do not represent the views or opinions of any other person or entity.