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What is a Trading Plan?


Written by Naeem Aslam  AvaTrade Chief Market Analyst Naeem Aslam

A trading plan is a comprehensive framework that guides your decision-making in any trading activity you undertake. A trading plan is to forex trading and CFD trading what a business plan is to a business. As the adage goes, ‘if you fail to plan, you plan to fail’. This is especially true in trading where risk is ever-present in the markets. A trading plan is not merely a trading strategy. A trading strategy will guide how you will enter and exit trades in the markets in a manner that enhances profitability and reduces risk exposure. A trading strategy can be based on technical analysis or fundamental analysis. A trading strategy is just one component of your overall trading plan, which goes beyond that to also capture your overall trading goals and motivation, your trading journal, risk management techniques, money management rules, as well as your trading psychology.

Why is Having a Trading Plan Important?

The ultimate aim for any investor or trader is to achieve consistent profitability in the markets. A trading plan is a guide that ensures you will stay on track on your journey to your desired destination.

It does so by:

How to Develop a Trading Plan

Elements that should be added to your trading plan:

Stick to your plan!

Questions to ask yourself when planning:

Why create a trading plan?

The same reason as when you start building a house, first you need an architectural blueprint. You would not simply start with buying the bricks and cement without having the correct foundations laid and knowing very well before you enter how much money you have to spend on the house.

It is much the same with trading, even if you have market experience it is not enough to go into a trade blindly. Forex and CFD trading should be treated like a business, that has an organized structure from which it can grow into a successful business.

Furthermore, when there are sudden changes in the markets, the trading plan will assist you with keeping in line with your objectives, and perhaps guard you from making any hurried decisions you could later regret. Trading objectively with your plan in place will allow you to have more confidence and less emotional participation.

Everyone should have a trading plan

Whether you are just starting out in the trading world or you are a seasoned professional, it is always advised to be prepared. A good trading plan will help you in many aspects, such as identifying your goals, organizing your research and finding trading statistics. The decision on which direction to trade in to stay in line with the markets will assist you in managing your emotions when on a losing streak and aid when recovering from a bad trade.

The markets don’t choose who they like, and anyone is at risk, new or experts, and without a plan the market will have no mercy. With more assistance in your day-to-day trading AvaTrade can help you with planning your trades as well as evaluating your risk. Join us now and get the best support 24/5 in your language.

Trading Plan main FAQs

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