Successful cryptocurrency traders typically follow a set of routines in executing their trades. These routines conform to their structured plans which have been refined until they are reliable. You need such structures to achieve consistent results in crypto trading, which is why you need a crypto trading plan.
What is a crypto trading plan?
A trading plan is a written structure that serves as a roadmap for your trades. It helps you identify and execute trade opportunities. The plan takes into account different conditions such as looking for trading opportunities, variables to consider before buying or selling a crypto token, cryptos to trade, the risk you are willing to take per trade and the management of your positions. .
With a trading plan, you can better manage trading risk and achieve more consistent results.
3 reasons why you should have a trading plan
There are many reasons for having a crypto trading plan, including the extra support it gives you.
1. Trading becomes simpler
Having a written plan allows you to negotiate easily. A detailed plan includes your trade entry conditions, the risks you want to take per position, your risk/reward ratio, trades to avoid and many more. Having all of this in place also helps you reduce stress and make more rational decisions.
2. Performance gauge
Since your trading plan includes different technical tools and strategies and fundamental metrics that you intend to include in your trading decisions, it can help you assess which strategies work best and under what conditions.
Following your plan and documenting it in your trading journal will also help you evaluate your trading decisions and refine them for improvement.
3. Business discipline and precision
Following a trading plan allows you to focus more and helps you execute trades with better accuracy. Also, following your rules will prevent you from making impulsive trades and bets.
Since you have conditions for entering and exiting trades, you will also be taking less emotion-driven trades.
How to create your trading plan
Below are some of the activities you need to complete to create your trading plan
Define your trading goals and approach
Your trading goal should be specific, measurable and realistic. For example, the goal might be to increase the value of your portfolio by 6% over the next six months. Having this in mind will help you define your approach to trading.
You can use your trading goals to determine conditions such as how much time you are willing to devote to trading, whether you can combine trading with regular work activities, how to keep yourself constantly informed of market events, and more. .
Define your trading strategy
A good trading plan should include your trading strategy. For example, you need to determine whether you want to trade as a scalper, day trader, swing trader, or long-term investor. Your strategy definition should also include the technical tools and indicators you intend to use and the factors and variables to consider when using them.
Some trading strategies require more trading time than others. Therefore, your daily activities and lifestyle should be taken into account when developing your strategy.
Document your risk management approach
You need to define how much of your capital you want to risk. It is wise to set your risk limit and follow it strictly. Although we cannot give a specific risk management rule, we advise against risking more than 5% of your capital on a single trade, especially when trading crypto futures.
Your risk management approach should also include a risk-reward ratio. Before entering a trade, you need to set your profit target. Traders typically use a profit target of 1:1.5 to 1:5, and some even target more. Suppose you risk $25 on a trade and expect to get $75 profit at the end of the trade. In this case, the potential risk-reward ratio is 1:3. Your profit target should be based on your trading strategy and market conditions and not necessarily your desire.
Define the markets or conditions you want to trade on
You cannot trade all crypto markets. Besides that this is impossible, each behaves differently from the other. So, trying to get involved in many markets at the same time might leave you confused.
You can specify the market you want to trade by choosing specific cryptocurrencies you want to focus on or having a market setup you want to trade consistently. Whatever it is, keep in mind that the secret to a successful trading plan is to follow the routines consistently.
Document your transactions
Have a trading journal where you document all your trades, the motivation behind them, the strategies you used, and the results. If you execute a trade outside of your trading plan, you should also write down why you did it and the outcome. Proper documentation will always help you improve your crypto trading plan.
Don’t trade crypto without a plan
There is no strict template for creating your trading plan. However, you should only create one based on your trading goals, you cannot copy someone else’s! Your trading plan could be a long, detailed note that has a step-by-step approach to trading. It could also be a short note that covers the cryptocurrencies you want to invest in, the terms for investing in them, and how much you are willing to invest. Which one you choose depends on your needs; Just be sure not to trade without a plan.
A trading plan is a work in progress. While we don’t encourage changing your plan on a regular basis, we also understand that adjustments would be needed from time to time. The crypto market is dynamic and you should adjust your plans based on market conditions. Similarly, a change in your financial goals may also necessitate a change in plan.
The information on this website does not constitute financial advice, investment advice or trading advice, and should not be relied upon as such. MakeUseOf does not give advice on trading or investment matters and does not advise buying or selling cryptocurrency, ever. Always perform your own due diligence and consult a licensed financial adviser for investment advice.