By Ron Leeper on The Capital
A critical factor in successful trading is preparing with a higher intensity level than the next guy. Often, that amount of preparation can be fundamental while still having a distinct impact on your bottom line.
Many people new to crypto-trading have little or no experience trading assets at all, that was me when I started in 2017. I quickly discovered that one of the best things I can do to help give myself an edge is to create a written trading plan every time I consider a trade.
There are several benefits to creating a written plan.
First, by taking the time to think through various aspects of the trade, one can avoid FOMO and the tendency to chase green candles. When a given crypto’s price is heading north in a significant fashion, the temptation to jump on the train can be considerable. The truth is, it’s quite likely the train has already left the station, and you will be better off waiting for either a retrace or flagging of the price action before getting onboard. Slowing the process down by writing out the particulars allows one to think clearly about what you’re doing and presents the opportunity to thoroughly look at the price action and patterns to see if opening a given position makes sense. It also provides time to look at the risk management side of things.
Second, once you’ve put in the work on a plan, you will be much less likely to change your mind if/when the market changes and unfavorable conditions present. You will already have considered the crucial “if this happens, then I will do that” aspect of trading and understand how you will respond to evolving market conditions.
Third, and I can’t stress this enough: it helps to keep emotions out of the equation. Once you have committed your trade plan to paper or your computer, you will be much less likely to respond emotionally as the trade moves forward. Further: it helps you avoid planning for a trade and then not taking it. If for no other reason, creating a written plan is worth the effort for that alone.
One of the reasons crypto-trading is so attractive to people is the freedom it brings to be self-employed and make the rules by which your business operates. (If you don’t think trading is a business, you & I need to have an honest conversation on that topic). To an extent, what you include in your trade plan is up to you, but I have some definite ideas about what a good plan does contain.
First, is this going to be a short or long position? If you’re a Bear seeking to make profits as the price moves down or a Bull who’s thinking the trend is moving upward, determining “short” or “long” has to be your starting point.
Second, what’s the reason you’re opening the position? What pattern or combination of indicators tell you this is a favorable time to pull the trigger on a given asset? Ideally, you’re seeking a confluence of pattern within the price action with one or more indicators (MACD, RSI) pointing to a probable direction for the price to move. Much to the disappointment of many, Technical Analysis is not a crystal ball and cannot foretell the future. What it can do is by providing graphic reference points, give one reason to think that, more likely than not, the price is going to move in a given direction. By creating this edge, the trader can consistently experience success over the long haul in the same manner that a casino does.
Third, a trader should consider entry/exit points and stop loss before opening the position and write them down. A trader is a person who pays careful attention to each of these aspects of a trade, a member of The Herd does not. Where one should open the position is again a matter of finding the combination of patterns & indicators that show the price will move in a favorable direction. Planning for exiting a trade is as important as when one should open it and is a reflection of your overall strategy. Once the position is profitable, will you take profits all at once or in stages? Speaking of exiting a trade, using a stop-loss is a basic technique that is overlooked by many newcomers. T/A does not provide a crystal ball and, you will open trades that go south. Knowing when to cut losses is an essential part of every trader’s education and understanding how to place a stop-loss correctly is a vital part of that process.
One final aspect of a trading plan that one should not overlook: use alarms to notify you when the price action has moved into favorable territory. Trading platforms such as TradingView and Coinigy allow users to be alerted when conditions are right to open a position. Setting the alarm is easy and, since most people are too busy to be in front of their computer 24/7, this can save you missing out on your entry point and all the disappointments that accompany that.
These are the basics of creating a trading plan that I have found to be useful and productive. As you grow and progress in trading, your needs will change as will the understanding that study and practice are providing. The trading plans you create in the future should reflect this growth on your part and will evolve from the very basics that I have presented here to a more fine-tuned version that matches the increased skill and knowledge that you will be utilizing. While a poorly written or thought out trading plan may be better than none at all, the amount of work that goes into creating a solid plan is minimal; no one should ignore that process.
You Need A Trading Plan, Even If You Think You Don’t was originally published in The Capital on Medium, where people are continuing the conversation by highlighting and responding to this story.