• Tue. May 28th, 2024

How to build a trading plan?


Jan 7, 2023

A trading plan is the trader’s roadmap . It determines your entry into the market. The rule is the same for all assets. On stock market indices, cryptocurrencies, forex or even shares, you must scrupulously follow your strategy.

Of course the psychology of the trader is part of the equation because your trading plan is designed according to a probable scenario. Your scenario may not come true and that is why it is useful to have several plans prepared. To put it simply, before being a trader, put on your analyst cap .

Mastering technical analysis is essential to a trading plan

When you prepare a trading plan, you must do a technical analysis of the underlying in which you want to invest. You need to draw supports and resistances on different timeframes. Above all, do not neglect the long-term price levels even if you are scalping. Significant volatility can occur all of a sudden as soon as the price touches monthly support or monthly resistance.

Technical analysis to prepare your trading plan

Also draw chart patterns, such as ascending or descending channels. The trend lines will be of great help to you. Also visualize if the index or currency has a bullish or bearish trend. Simple moving averages or exponential moving averages will help you perfectly for this. Look at the crossings of the moving averages following the time units. These trend indicators are indispensable.

In addition, using an oscillator like the MACD indicator and/or a momentum like the RSI will be almost essential. They will help you identify a bullish divergence or a bearish divergence for a potential upside or downside reversal.

Also observe the chart patterns of Japanese candlesticks (morning star, evening star, doji, etc.). Finally, Bollinger Bands will help you define cycles of volatility. In short, all this put together allows you to define trading signals.

Do fundamental analysis for your trading plan

Once you have graphically analyzed your chart (chart), you must also take into account macroeconomic announcements so as not to be trapped. The economic calendar is the essential stock market tool to be aware of the main economic publications.

Fundamental analysis with the economic calendar

If you trade Forex and primarily the Euro Dollar exchange, there are some major publications that you need to consider. The NFP or US Job Creation Index is the indicator that greatly increases the volatility of this currency. This announcement can cause a trend reversal and transform a bullish movement into a bearish movement.

Even on global equity indices, fundamental analysis should be considered . A useful tip is to put vertical lines on your chart for some important macroeconomic releases . You will then have a visualization of when you should avoid trading or be careful with your market position.

Have a simple trading strategy

Now that you know what to do and what information to put in your trading plan, we’ll give some examples of strategies. We will see a simple process for doing a chart analysis with technical indicators and some chart patterns. In addition, we will also give you the basis of your fundamental analysis taking into account the macroeconomics to avoid pitfalls and volatility peaks.

You have to know how to keep your trading method simple . Reading your stock chart and plan should be clear. In short, it will force you to be rigorous.

Approach for a beginner trading plan

If you are a beginner trader, you should initially limit yourself to a number of daily or weekly trades. Scalping is absolutely not suitable if you are not an experienced trader.

Next, one of the best ways to start trading for a beginner is to define a trend following trading plan . “Trend is your friend”. When you have properly plotted your monthly or weekly price levels with your supports and resistances, it is much easier to trade in the direction of the trend rather than going against the trend.

Trend following trading plan

If you want to trade against the trend, identify reversal patterns in important areas. The breakout of a trendline or the breakout of a moving average can tell you of a trend reversal.

Additionally, using Fibonacci retracements to find entry points, or trading bounces off moving averages will be more effective. Looking for a trend reversal to enter the market and find a “top” or a “bottom” on a financial asset is much more difficult.

Whether you’re buying a stock, trading an index, or trading crypto, your method for making your plan should be the same.

Example of an effective trading strategy

We are going to give you an example of a simple trading plan on the DAX30 index in order to establish a trading strategy on several possible scenarios.

First, the long-term supports and resistances are defined. They make it possible to identify zones of entry into position in the event of a reversal of the market. Next, the daily supports and resistances are also plotted to have short term intervention areas. It is also necessary to observe certain candles one by one. The previous day’s closing price associated with the 8H opening price of the future market is of great importance.

The daily and weekly pivot point will be very important to define psychological price levels and possibly have areas of market positions. Also remember to define the GAPs on your chart. Bullish gaps and bearish gaps have their importance on the market trend.

Dax day trading strategy

Then, thanks to the various technical indicators, we can define if the market confirms a market trend or if it hesitates. The 20 moving average and the 50 moving average will be very useful for day trading.

Finally, trend lines or the identification of chart figures are drawn to possibly have other possibilities to define a buy signal or a sell signal. Often Bollinger Bands show you the volatility but also the strength of the market trend.

With a trading plan like this, you have the flexibility to deal with different scenarios. Depending on your chartist analysis , you will know when to look for buy signals or sell signals.

Make a trading plan to control your risk

Now you know how to make a good trading plan . Remember that you must be rigorous and follow this plan to the letter. This will automatically limit the risk to your capital. The objective is to make capital gains. We have seen how to use technical indicators like moving averages and momentum. You also know how to integrate a volatility indicator with chart figures.

Thanks to this whole process, you can face different trading scenarios and above all you know how to define your “take profit” objectives and place your stop losses properly. Finally, a rule that must be absolutely respected is not to change your plan if you have entered position. Unless you have a largely profitable position, never move your stop losses or risk bringing psychology into the equation and losing your sleep.

Leave a Reply

Your email address will not be published. Required fields are marked *