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Market sell-offs mean traders need to stick to the plan

You should under no circumstances consider the information and comments provided as an offer or solicitation to invest. This is not investment advice. The information provided is believed to be accurate at the date the information is produced.

This year has begun with some challenging conditions for traders, with sell-offs, recoveries and a changing economic backdrop driving the markets. This situation shows the value in putting together a trading plan that will help you manage risk and stay on track for your trading goals. We explain some of the aspects you might need to consider when creating a trading plan.

Manage your risk: why is it important to have a trading plan?

  1. Fail to plan, plan to fail

Daily trading means focusing on individual assets and you may lose sight of your goals and make emotional decisions. By creating a trading plan, you can take account of the risk in your trades, set rules governing your strategy, and establish your profit objectives. Without a plan in place, it becomes more difficult to know when to move in or cash out of your positions.

  1. Goal-setting and knowing your limits is essential

Before trading, setting goals and understanding risk is essential to your success. Trading shouldn’t feel like a rollercoaster ride, so understanding the amount of risk you are happy to take on and the realistic profits you think you can achieve from trades is pivotal in your journey to success. You must always understand that your capital is at risk first, rather than the potential profit you might make.

  1. Creating a plan allows you to find the best strategy

Profits and returns might not come on day 1 but this may give you the chance moderate your plan as time goes on to create a winning strategy.  A plan allows you to see where you might be going wrong, where you can try different approaches and when hedging might give you more freedom in other areas.

Achieving excellence: our top tips for creating a trading plan

  1. Adapt to a changing world

A good trading plan takes time and shouldn’t be rushed. Your plan should be clear on the outcomes you wish to achieve and the routes you can take to achieve your aims. It means creating a decision framework for understanding how to evaluate trades and whether they are worth making. This framework should take time to develop through hours of homework, and should be refined over your trading career.

  1. Set goals

Understanding what you want to achieve from trades is vital to your success. By setting goals, you can take a disciplined approach to trading and understand why you are entering a position and how it helps you achieve overall success.

  1. Practise, practise, practise

Successful traders hone their skills and strategy over years and years of practice, as well as trial and error. It is unlikely that you will achieve consistent profits in the short term so it is a good approach to practise via paper trading and hone your skills before risking real money.

  1. Know your exits

It is important to know when your trade has reached its optimum value for your aims. For example, if a trade goes well, pre-establish a profit target to make money whilst also have a Stop Loss in place, so that you don’t run up losses if the trade goes wrong. This will help you manage your money and reduce losses.

  1. Understand your weaknesses

Not every trader will be an expert in every kind of asset, situation and market, so it’s worth setting some rules in place to know the types of trade you will and won’t be involved in. At least until you’ve done the research or tested out the market with some lower-stakes trades. Successful traders are aware of their weaknesses, the asset classes they won’t yet trade, and which market signals they find most valuable.

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