Successful cryptocurrency traders usually follow a set of routines in carrying out their trades. These routines are according to their structured plans that have been fine-tuned until reliable. You need such structures to get 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 accounts for different conditions like how to look for trade opportunities, what variables to consider before buying or selling a crypto token, what cryptos are to be traded, how much risk you are willing to take per trade, and how to manage your positions.
With a trading plan, you can manage trading risks better and get more consistent results.
3 Reasons You Should Have a Trading Plan
There are many reasons to have a crypto trading plan, not least the extra support it gives you.
1. Trading Becomes Simpler
Having a written plan makes it easy for you to trade. A detailed plan includes your trade entry conditions, the risks you desire to take per position, your risk-to-rewards ratio, the trades to avoid, and many more. Having all these in place also helps you reduce stress and make more rational decisions.
2. Performance Gauging
Since your trading plan includes different technical tools and strategies and fundamental metrics that you intend to include in your trading decisions, it can assist you in gauging which strategies work best and in what conditions.
Following your plan and documenting it in your trading journal will also help you evaluate your trading decisions and refine them to improve.
3. Trading Discipline and Precision
Following a trading plan makes you more focused and helps you execute trades with better precision. In addition, following your rules will save you from making impulsive trades and gambles.
Since you have conditions for entering and exiting trades, you will also take less emotion-driven trades.
How to Create Your Trading Plan
Below are some of the activities you need to carry out in creating your trading plan
Define Your Trading Goals and Approach
Your trading goal must be specific, measurable, and realistic. For example, the goal could be to increase the value of your portfolio by 6% in the next six months. Having such in mind will help you define your approach to trading.
You can use your trading goals to determine conditions like how much time you are willing to commit to trading, if you can combine trading with regular work activities, how to keep yourself constantly updated on market happenings, and more.
Define Your Trading Strategy
A proper trading plan should include your trading strategy. For example, you should determine if you want to trade as a scalper, day trader, swing trader, or long-term investor. Defining your strategy should also include the tools and technical 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 considered when considering your strategy.
Document Your Risk Management Approach
You should define how much of your capital you wish to risk. It is wise to define your risk limit and follow it strictly. As much as we cannot give a definite risk management rule, we do not advise that you risk more than 5% of your capital on a single trade, especially when trading crypto futures.
Your risk management approach should also include a risk-to-reward ratio. Before entering any trade, you should define 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 as profit at the end of the trade. In that case, the potential risk-to-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 in
You can’t trade all the crypto markets. Apart from it being impossible, each one behaves differently from another. So, trying to get involved in many markets at the same time could leave you confused.
You can specify the market you want to trade by choosing specific cryptocurrencies you want to concentrate on or having a market setup you want to trade consistently. Whichever one it is, keep in mind that the secret to having a successful trading plan is to follow the routines consistently.
Document Your Trades
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 your trading plan, you should also note why you did that and the result. Proper documentation will always help you make your crypto trading plan better.
Don’t Trade Crypto Without a Plan
There is no strict pattern to 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 lengthy and detailed note that has a step-by-step approach to trading. It could also be a little note that covers the cryptocurrencies you want to invest in, the conditions for investing in them, and how much you are willing to invest. Whichever one you go for depends on your needs; only make sure you don’t trade without a plan.
A trading plan is a work in progress. As much as we do not encourage altering your plan regularly, we also understand that adjustments would be needed from time to time. The crypto market is dynamic, and you must adjust your plans based on market conditions. Likewise, a change in your financial goals may also necessitate a change of plan.
The information on this website does not constitute financial advice, investment advice, or trading advice, and should not be considered as such. MakeUseOf does not advise on any trading or investing matters and does not advise that any cryptocurrency should be bought or sold, ever. Always conduct your own due diligence and consult a licensed financial adviser for investment advice.