How To Develop Your Own Successful Crypto Trading Plan
Active trading of cryptocurrencies can be a very emotional and stressful journey if you don't have a trading plan.
Fundamentally, a trading plan is a comprehensive outline that helps traders make critical decisions in the trading process. It details conditions under which a trader identifies markets, enters and exits a trade as well as manages risk.
Unfortunately, most people trade without a plan. No wonder they lose money. Don't be like them. In this guide, we cover six essential steps to help you create a successful plan of your own.
Step 1. Outline Your Motivation
Every winning crypto trading plan start with a clear motivation; why are you trading in the first place, and what are you looking to achieve from it?
This will enable you to set specific, measurable, actionable, realistic, and timely (SMART) goals. What's fantastic about personalised SMART goals is that they provide benchmarks for reviewing, comparing, and improving your trading results.
“Ultimately, I want the value of my portfolio to increase by 15% in the next 12 months. To achieve this, I will take up opportunities twice or thrice a month, if they fit my trading strategy. I want to create consistency and increase my risk after three months if I meet and exceed my 15% goal. I will also continue learning by reading trading news at least twice a week.”
Defining your goals also requires awareness of the type of trader that you are. Your trading style will be informed by your personality, how you approach risk, and the time you can dedicate to trading.
Step 2. Decide how much Time You can Commit to Trading
How much time are you willing to commit to the various requirements of crypto trading and managing a trading system?
If you have to combine trading and other activities such as a full-time job, your trading plan will help you pick the right kind of trading for you. You will also be able to pick trading hours that are most favourable to you, such as late-night hours or early in the morning.
Those who trade shorter time frames (day-traders) will need to spend more time in front of the charts. On the other hand, since swing-traders and position-traders trade on more extended time frames, they'll spend less time watching the market.
You will also need to include hours you spend building your trading capacity; through learning and practising what you learn by reading guides and analysing the markets. Whatever time you decide on, just make sure you commit to it.
Step 3. Choose a Risk-Reward Ratio
Crypto markets are highly volatile. As a trader, you have no control over what happens in the market, but you can control what you do to adapt to evolving market conditions. That said, managing your risk is a crucial factor for long-term success.
With a well thought out risk-reward ratio, you can even lose more often than you win but still stay consistently profitable. Most successful traders use a rate of 1:3. Simply put, your potential profits should be at least twice the possible loss.
To come up with a risk-reward ratio, make a comparison of the amount you are risking against the anticipated profit. For example, if you risk $200 and the expected gain is $800, the ratio is 1:4. Bear in mind, nothing is guaranteed in a volatile market.
Step 4. Decide how much Capital You have for Trading
It is essential to plan for the amount of money you want to risk. If you cannot afford to lose a certain amount, do not invest it! Trading is awash with risks, and you could lose all your money on it.
Do your calculations and be sure you can have the funds for the maximum loss on every trade. Some traders use this rule: never risk more than 2% of your trading capital on a single trade.
Step 5. Assess Your Market Knowledge
Once you identify the crypto markets you would like to trade, learn as much as you can about the market. You can even come up with a weekly learning schedule to keep you on track.
Assessing your strengths and weaknesses will go a long way in enabling you to decide which direction to take. To fix your knowledge or skill gaps, you may opt for crypto trading courses, read crypto trading books and blogs, or even better find a mentor.
Step 6. Record Everything!
A successful trading plan is backed up by a trading diary. This is an important document to keep track of all your trades. A trading diary will help you find out what is working in your plan, and what you should do away with. The end goal is to create a trading process that is transparent and free of bias.
Important information to note in your trading diary includes:
- Your entry price
- Your exit price
- A snapshot of the chart at the time of entry and exit
- The position size
- Your original stop loss and take profit levels
- The rationale behind your trading decisions and emotions.
- Your emotions during the trade!
- Your profit or loss
- Any deviations from the original plan, and the reason for the deviation
The more detailed your diary is, the more helpful it is when identifying errors and inconsistencies in your trading journey.
The most challenging part about writing a trading plan isn’t defining your rules. In fact, you will realise once you start developing your trading plan, most rules fall into place quite easily. The hard part is following your plan, and giving it a chance to work.
Most traders tend to throw their plan out as soon as they experience a losing trade. What usually happens is that a trader will achieve a couple wins, and then experience a few losses. They will then be scared to execute their trading plan.
You may experience a few losses, but if you have a sound trading plan as your edge, only lack of patience and discipline can be your enemy.
Give your trading plan a chance to work out.
What Tips Do You Have to Share?
If you have some handy trading tips to help those developing their first trading plan, please share them in the comments below!
About the author:
Jay Jackson is a blockchain enthusiast and a freelance writer at topcryptowriter.com. He works closely with brands (people, businesses and startups) in the crypto sphere. He currently writes Blog posts, Guides, Press releases, ICO reviews, eBooks & Whitepapers. You can find him on LinkedIn.
The above references an opinion and is for informational purposes only. Do not take this as personalised financial or investment advice. The views expressed by the author do not necessarily represent the opinion of BitPrime.
Main image courtesy of Pexels.
Last updated: 09/10/2019