Every successful business needs a business plan. In the same way, every trader to be successful must have trading plans. Having a trading plan removes the emotions from decisions made during trading. It defines what your responses are going to be at any point during a trade.
A plan, no matter if it is for trading or a typical business, sets into place all of the things the owner or whoever will be implementing it will be needing to make sure his operations are running without a glitch. Take for example the fast food giant, McDonald’s. Every single day the company is cooking and selling hamburgers and other food items all around the globe. How are they able to do it with such consistency and efficiency? It is because of their plans.
You would never consider starting a business such as a restaurant or a gardening business and spending $50,000 to $100,000 to establish it, without first completing a thorough business plan. Yet somehow, people see trading as being different. It is not. You are going to invest a significant amount into your trading. Treat it with the same respect you would any other business, and draw up detailed trading plans.
A well thought out, well documented trading plan is the key to success. A good guide as to whether this is a solid plan is to write it out and then give it to someone else to read. If they are able to understand it and to go through it with a minimum number of questions, you can rest assured that you have completed a competent trading plan.
Why is it important that you write your own trading plan? Simple, because it is your sole responsibility on what is stated in that plan. Aside from that, it is so that you will understand that in case you make mistakes in your trading, you will know what exactly to change in your plan.
A proper trading plan covers three main areas. First, it must have tested entry rules. This is a precise set of rules that a tradable instrument must pass through before you enter any trade. The rules must be simple and easy to follow.
Do you have your exit rules clearly defined in your plan? If you have entry rules it is therefore also important that you know when to exit a trade. This is because it does not make sense that you know when to enter a trade and yet you do not know what are the criteria you should be looking out for to know that you have achieved all that you can from that trade, whether it is a winning or losing situation. If it is a losing situation then at least the goal is to minimize your losses. Do not let it bleed as they always say.
And last but not the least, the need for a very strict money management is of high necessity especially if you know your assets for your trading are very limited. Again, this is to help you minimize your losses.
Any trading plans or best trading system encompassing these three basic components will allow you to achieve success in your chosen market.
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