Smart investors have a professional trade plan because no trader enters the market without the desire to be successful, and everyone who ventures into crypto trading does so with a desire to get a reward for their risk. They want to make a profit, the same way business owners and entrepreneurs do. However, while business owners have a business plan to achieve their goal, most traders leave their desires to chance and ride without a trading plan. To flourish as a trader, you must have a smart plan.
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What is a trading plan?
It is a comprehensive decision-making tool that assists you in outlining what, when, and how you are going to trade in the markets. It is your roadmap to successful trading and answers the crucial questions of trading before you begin trading.
It’s something that you should create on your own and for yourself. Though the trading plan can be whatever works for you, it needs to be written down if it must be called a plan.
A trading plan is a plan that you stick to in all situations. It is a tool that will provide you with a strategic vision for your trading, and give you guidance on which market to trade when to take profits, when to cut your losses, and where other opportunities could exist.
It would be best if you had a trading plan because it can help you trade sensibly, and to make logical trading decisions. A plan will enable you to trade without bias even when your emotions are running high, or low.
So, with that in mind, how can you set up a proper trading plan?
Here we consider a few of the questions a professional business plan should answer.
What are my trading goals?
Before you set out to trade, have a goal of what you want to achieve in mind. This means setting realistic profit targets within a specific time frame and within a particular scope. It will help you narrow every other thing in this plan down to the goal you have in mind.
What is my risk-reward ratio?
Decide on the ratio of risk to reward that you’re willing to take on every trade. With market prices always changing, deciding your risk limit is essential. It helps prevent an over or under trade in an objective and non-emotional manner, despite how good or bad a prospective trade looks.
The risk-reward ratio for every trade entry setup is that amount of risk exposure on your trade balance, against the potential gain. Let’s say you’re risking $1000 on a trade, for example, with a potential profit is $3000, the risk-reward ratio is 1:3.
How much capital do I have to trade?
Your trading plan should help you decide how much capital you are willing to bring into the game. Recognize the amount of money you can conveniently afford to commit to trading.
As a safety rule, never risk more than you can afford to lose as trading involves plenty of risks and uncertainties.
What are my entry and exit points?
Another critical question to answer in your trading plan is what your entry and exit points will be.
Before you enter a trade, ask yourself, “What conditions have to be met before I enter a trade?”
“At what point, and under what conditions must I exit?”
Make sure to identify where your entry and exit points are before beginning to trade. Identify and write down what your stop-loss is if the trade goes the wrong way. Just remember that mental stops don’t work in the heat of the moment.
What is the market saying?
Although the plan is yours to make, you must put the market conditions in perspective when drawing up a professional plan. You cannot afford to use trading rules that are obsolete and goes against the trend and the prevailing sentiment. Your goal is to make a profit out of every trade. So regularly review your plan to see what direction the market is moving and to make adjustments to your plan if necessary.
How much time am I willing to put in?
Also, your plan should identify how much time you can afford put into trading. It will help you to keep a steady routine and avoid burnout.
A trading plan, we have established is of great importance and a must for everyone who wants to succeed as a trader.
Although the above questions are the basic requirements for a trading plan, that doesn’t stop you from adding other questions you believe are valid and necessary for your trade.
We also recommend that you keep a trading diary where you journal your trading progress, and to do check on your progress regularly.
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