Before you get started with developing a trading plan, it is essential for you to know which trading style is suitable for you or which trading style are you most comfortable with.
There are different types of trading styles like scalping, swing trading, day trading, etc. Each trading styles is different in its own way. Some trading style is time consuming and some require lesser time, so depending upon the time you can choose a trading style.
There are many other factors which you should consider while choosing a trading strategy or trading style.
1. Rules to enter a trade
This is the most crucial factor for developing a trading plan. We call it the foundation of any trading plan, the stronger the foundation, the more confident you get in your trading.
Create a set of rules using your strategy and only enter into a trade when that trade fulfills all the necessary conditions which you have in your rule book. This will help you to be consistent and will also keep you out of bad and unnecessary trades.
2. The risk to reward
A realistic risk to reward helps you to grow your small accounts exponentially. So, before you enter a trade always consider the risk-reward of that particular trade. While choosing a trade always look for a trade with a higher risk-reward ratio but make sure you are reasonable with that.
3. Know when to get out of a losing trade
We always say the forex market is full of opportunities, and one trade doesn’t decide who you are, and it must be treated in the same way. Always cut your losers short, create a set of rules which will help you get out of a losing trade effectively
4. Know how much potential your winning trade posses
Predetermine the potential of the trade you enter, and when that trade is in profit, try to ride the trade till your predetermined level, don’t cut your winners too small. But always be reasonable while determining the profit potential.
While doing this regularly, try developing a set of rules for this and stay disciplined enough to follow those rules.
5. Predefine your risk
Always predefine the risk of a particular trade and only enter the trade if you accept the risk and if it won’t affect you even if you lose that specific trade. If the risk is too high, then try using a small lot size and if the risk still posses a significant threat to your account which you are not prepared for then avoid it, look for another opportunity.
6. Set long-term goals
Setting long-term goals will completely change your perspective towards trading. If you have a long term goal, it will help you keep disciplined on your trading plans and will also keep you away from greed.
7. Maintain a trading diary
Maintaining a diary is a great way to find out what is working in your favor and what isn’t. It helps you keep a record of your winners as well as your losers and helps in improving your trading.
We personally use this technique and can tell you this trick works wonders and will surely bring positive changes in your trading. I maintain Three diaries at a time, one for reviewing trades, one for writing all the mistakes made and another one for back testing and analyzing the behavior of a particular chart.
These are the factors which you should look for while developing a trading plan.