Building a Trading Plan when trading or spread betting is key to keeping you in check and avoid making costly and continued mistakes.
Just like with investing, you need to have a plan – a reason behind what you are doing, what sort of risk you are looking to take, what your exit plan is and so forth.
Make no mistake about it, at some point you will lose money when trading. But these losses won’t necessarily be sustained with a good plan.
Here we look at some key steps to get you thinking about how best to build a trading plan:
Key considerations to build a trading plan
- Understand why you are getting into spread betting and what you hope to achieve from it. Think about how much time you can spend trading – as a likely part-time trader, think about how you can fit the demands it requires in line with your home and work life.
- Define some realistic and achievable goals. With the potential for unlimited profits, it’s easy to get carried away. Have a think about the reward you are looking for – this will keep you in-line. A simple goal may be ‘I want to generate a 20% return’ – a better goal will add a timeframe to this i.e. 20% over a six months.
- Understand your risk tolerance. Psychologically you must be prepared for the volatility of trading – it requires a different mindset to investing. Think about how much capital you have (and can afford to lose) as well as your approach to trading. Position Sizing is a helpful technique to avoid committing too much capital to a single trade. And stop losses are fundamental to avoid huge and bottomless losses racking up.
- Play to your strengths. Just as you would only invest in something you know about, the same goes for trading. Don’t take punts on areas you know little about – for example emerging markets. If you are trading on shares, you may know or be interested in a particular sector more than another – so go with that and become a pro in it.
- Develop a trading diary. Keeping a diary may be old school, but a trading diary is a good idea. Denoting your positions, the logic behind the trade and your feelings about trades can help you understand yourself a bit better and also avoid history repeating itself!
The saying goes fail to plan, plan to fail – and this is incredibly relevant to trading. It offers fantastic opportunities to profit but also could leave you nursing heavy losses if you don’t think about what you’re doing.