Every business has a business plan, so how can trading be different. A detailed trade plan should be prepared before venturing into the trading business. A trading plan provides the same level of discipline and detailed attention to your trading business as you give to any business you manage. By documenting a trading plan, you know what works and how to avoid costly mistakes in your trading. Ask any successful trader who consistently makes money on a consistent basis; his answer will be he has a trading plan and trades according to the trade plan.

Trading Psychology

The psychological aspect of trading is very important. Traders often trade in and out of stocks at short notice, taking quick decisions. To accomplish this, they need a certain presence of mind. Discipline is required so they will stick with a previously established trading plan and know when to book profits and losses. Emotions should not get in the way. Trading should be rule-based and not emotionally driven. Emotionless trading adopts a systematised trading approach, continuous learning and evaluation. Mental toughness, highs and lows are a part of trading. Learn to handle wins as well as losses. The perfectionist approach eliminates perfectionist expectations at the start of your trading day. Learn to overcome Anchoring bias and Confirmation bias. Physical and mental fatigue has a significant impact on financial decision-making. Adopt a practical approach to manage the same. Specific mind training techniques have a strong impact on attention, self-control, decision making and regulation of emotions.

Personnel & Financial Goals?

Define your goals and reason for trading. In business, you achieve success if you have a set of clearly defined goals. Have a clear picture of what your overall personal and financial goals are and link them to your trading plan. Ask yourself if are you trading for additional cash flow or wealth creation.

Measuring Success

Capital allocation, reward-to-risk ratio, setup cost of your trading business, trading journal, your initial roadmap, and scaling your trading business are factors you need to learn and understand.

Trading Style

There are various styles of trading (a) Day Trading (b) Swing Trading (c) Positional Trading and (d) Long Term. If you are looking for cash flow, then you should select day and swing trading, and for wealth generation, you should look at selecting a positional or long-term. Each style of trading has its advantages and disadvantages. Day trading and swing trading require a considerable amount of time dedicated to the trading business. If time is a constraint, then one should look for another style of trading. Day trading and swing allow you to take leverage since relatively small capital is required to initially start the business. The positional and long-term requires larger capital, as leverage is not recommended. When trading for cash flow, the profit per trade and risk is small compared to long-term trading.

Trading Journal

Keeping a trading journal is an effective way to record your trading patterns and other factors relevant to your trading. Review both your open and closed trades. Have a separate trading journal for day trading and swing trading. Trading journals can be as simple as making notes of all your trades or can create an excel spreadsheet. Write down your conclusions in your trading journal so you can refer to them later.

Money Management

Determine the amount of capital you are prepared to risk on each trade as a percentage of your trading account capital. Apply position sizing rules. For the active style of trading, have a weekly and monthly loss limit. Once the limit is hit stop trading for that week or month. For new traders, risk per trade should not exceed 2% of your capital and for experienced traders, it can be 4%.

Simulator – Paper Trading

Virtual stock trading is a simulated trading process in which traders can practise trading without committing money. In a simulated environment, a trader can test his strategies, and mental approach and understand the nitty-gritty of trading without actually losing money.

Do your homework

Before the market opens, do your check on what’s going on around the world. Know the calendar of economic data releases and corporate announcements and corporate results. It is better to wait until the report is released rather than take unnecessary risks associated with trading during volatile swings.

Trading Strategy

Have a name for your trading strategy and define what your trading strategy is. You can have a retracement trading strategy or a momentum trading strategy. Define the study with which you will take retracement trade, it could be a support or a resistance for long or short trade or a pullback to a moving average. Momentum trading can be buying or selling price breakouts, moving average breakouts or a mechanical trading system like RSI or MACD etc.

We will be back with the 2nd part soon. Stay tuned