What is a trading plan and why is it so important to follow it?

What is a trading plan?

Everyone has unique trading techniques and preferences. What beneficial for one individual might not work for you. So, it is vital to have a trading plan that suits your personality. This trading plan must answer questions like how, when, and why to lessen the risks of mistakes that will most likely lead to losses. In addition, it makes trading less complicated and more organized.

Trading plans and trading systems

Let us clarify the difference between these two first before anything else. A trading system refers to the way you enter or exit trades. On the other hand, a trading system refers to a part of a trading plan. Hence, it’s only a part, and it covers a few essential elements of your trading plan like analyses, risk management, executions, and the like. Therefore, a wise trader will always opt to have several trading systems and not just one.

So, why would I need to use a trading plan?

You want to use trading plans because your goal would always be constant profits. A trading plan helps you know whether you are on the right track or not. It is like a measure of how well you perform in your trades. They allow you to keep an eye on your progress. As a beginner, it might still be an excuse for occasional losses. However, if the failures outnumber your wins, you either do not have a trading plan or follow the one you created. Why? If you have one, you will easily spot where you went wrong, and you will quickly know what to do if the problem is still correctable.

Discipline is the key.

Let’s say that you are winning even without the help of trading plans. You might think that they are not helpful after all. At this point, it is essential to maintain your discipline even in the long run. Not using or not following trading plans makes you want to abandon them.

Justified wins and unjustified wins

A justified win is an output of using and following trading plans. On the other hand, an unjustified win also involves rewards and profits without using trading plans and is most likely from pure luck or coincidence. There’s also a big chance that these are only temporary. What will happen to you in the long run?

A few disclaimers for traders

We are not implying that trading plans will always guarantee profits. All we are saying is that they will massively help you bring hefty profits and stay in great opportunities longer than if you opt not to use one. Trading is not a simple game of buy and sell. It’s not a petty gamble. It may look like it, but there are a lot of elements to consider. You want to use trading plans because you want to survive than fail, especially if you are a novice. A wise trader always gets the law of averages to get the best results, and discipline will almost always result in profits.