What is a Trading Plan?
A trading plan may be defined as a robust set of rules and guidelines that demonstrate your trading behavior in the market.
The trading plan includes important things such what the trading system will be, what strategies in case of risk might be involved, goals of the trade, financial rules, etc. Planning is the most critical step in any activity. A plan gives you direction a sense of achieving your goal.
Moreover, it clearly defines your boundaries in all conditions and minimizes the possibility of loss in trade. Any organization has already planned to fail if it has failed to plan.
Need for a Trading Plan
The most dominant reason why we need a trading plan is that in case of any mishap we wouldn’t have to rethink more, that is if we already laid out our risk strategies. In short, if we already have ideas as to what our approach will be in case of financial loss or any other condition, it wouldn’t take long for the organization or business to get back on track.
Moreover, a trading plan is also necessary because in situations like when the organization is making a great profit or is in the loss, emotions may consume the organization heads and they might make an irrational decision. Trading plan minimizes these kinds of mistakes. Moreover, trading plans may save organizations in the heat of the moment.
Factors that Shape a Trading Plan
An important fact to keep in mind is that, in trade, it is not necessarily true that if the trading plan of an organization is proving useful to them, it will also be fruitful for you.
Each organization must keep different things in mind while making a trading plan. In the making of trading plans, there may be several contributors, for instance, the industry itself has a specific set of rules which are made to minimize loss or to maintain a particular flow of trade.
The investors also give specific trading policies that are added to the trading plan. Among these can be strategies in conditions of loss or approaches in case of profit to increase the profit even more or some investment strategies.
The priority of investors while making the trading plan is obviously to earn more profit and to make the chances of loss as small as possible.
Developing a Good Trading Plan
To develop a good trading plan, certain aspects must be taken into notice. The first step should be noting all the objectives and goals that we want to seek out from the trade.
These must be quite precise and clear and should be purpose oriented. While forming a trading plan, one must be familiar with the current market trends and then chose their form of trading.
All the possible risks should be taken into notice, and a smart move would be to have a backup plan for all such cases. Choosing a trading system where the trade will enter, and leave is also a very important part of the trading plan.
Moreover, the plan should be made in such an as to prevent emotional interference so that one’s judgments aren’t clouded by their feelings. And last but not the least a trading plan must include revision schemes so that their trading plan remains flexible and more suited to the market.
What is Forex Risk Management?
Forex refers to foreign exchange. Forex risk refers to the risk that lies in the investment across two different currencies and may result in a decrease in value. It is also known as currency risk or exchange rate risk.
The forex market involves a tremendous amount of risk and forex risk management is the process of achieving more benefit while taking appropriate risks.
Since to gain more profit, one is bound to go out of their usual comfort zone and take risks. Forex market contributes to one of the biggest financial market contributing approximately 1.4 trillion Dollars (US).
Forex risk is merely a form of potential loss or profit in the trade due to the difference in currencies. Forex risk management includes actions and strategies to minimize the loss in case of potential loss.
Forex market is one of the riskiest places to make investments. An efficient way is to only invest to the extent which one can afford in the worst-case scenario.
The harsh truth about the forex market is that it is entirely unreliable, exchange rates of the two currencies are affected by even the smallest change in the news, political problems as well as foreign policies.
In such a condition one must take a rather moderate approach to minimize their loss in case of fluctuations in exchange rates.
It is widespread mistake done by a lot of forex traders, they invest all their resources and go all in, and when the exchange rates are affected due to whatever calamity, they end up losing all their shares and assets.
An important factor in keeping oneself on the bright side of the trade is to be aware of. Since the forex market is fluctuating, even a small amount of time precision affects a person’s or organization’s assets.
Hence knowing when to cut off is one of the most efficient moves in risk management in terms of forex trade. This is how risk management works; if an organization can learn to control their losses, they’re on the profit side.
Another important realization is that forex trade should not be the only source of ones’ profit, meaning one shouldn’t keep all the investment in a single place. This rule applies to both forexes as well as a regular trade.
Utilizing the fluctuations in the exchange rates by accommodating the fluctuations and changing the strategies as to profit from them is highly resourceful since one can’t fight with the current market rates and trends. And the last factor is to utilize leverages but only to a limited extent and not get caught up in its temptation.
Effect of Trading Plan in Increase of Profitability Percentage
The trading plan gives direction to a business or trade. Having a good trading plan means that the organization is capable of withstanding fluctuations in the market and is also capable of managing itself in any loss and even in profit.
One of the most significant benefits of having a good trading plan is the one has realistic profitability goals and objectives which are purpose-oriented. They completely answer the question what the current experience of a person or organization in trade is, what is its aim and motivation, what is it’s the strategic approach towards risk, etc.
Mental Satisfaction and Confidence
A positive side of having a good trading plan is that one is mentally prepared to face any problem since one has contingency plans listed out for all circumstances.
This, of course, means that emotional interference will be as low as possible hence minimizing the chances of silly mistakes. This in short means higher profit.
A person or organization is familiar with risk levels they can afford also known as risk tolerance. In normal circumstances the range is from about 1 to 5 percent and if the loss increases more than that it means that the trading plan is inefficient and has many flaws in it.
The trading plan helps us get familiar with the maximum risk that one can take and maintain a good profitability percentage simultaneously.
Solid Exit and Entry Point Rules
A plus point of having a good trading plan is one is familiar with exit and entry rules and can benefit from them.
A strange fact to note is that in the market approximately 80 to 90 percent of the people are concerned with how to buy, but the point as to how to sell is the very week leading to an automatic decline in profitability percentage. And an important fact is that exits are far more important than entries.
This is because most of the loss occurs due to inefficient and poor exit rules. Hence, one must have clear entry and exit rules and have a great focus on the later.
If we can control these, then we are above average traders in the trade market who pay less heed on exits and lose a lot without even realizing, small things matter in trade.
A good trading plan helps keep the record of trade saved. Studying the records can teach a person or organization a great deal.
We can learn the reasons of success in case of the profit and observe why we faced loss and what were the changes that lead to either of the cases. In such scenarios, we gain solid control over the trade and chances of making careless mistakes reduce by a great percentage leading to more profit.
Moreover, observing trends is a key component in marketing as already discussed. For instance, one of the famous examples is of Nokia which was going great till a half a decade ago, but due to lack of monitoring on the changing trends, other companies like Samsung and Apple overcame it quickly.