How to Create a Cryptocurrency Trading Plan
Successful cryptocurrency traders typically follow a set of routines in conducting their trades. These routines correspond to their structured plans, which have been refined until they are 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 road map for your trades. It helps you identify and act on trading opportunities. The plan takes various conditions into account, e.g. B. how to look for trading opportunities, what variables to consider before buying or selling a crypto token, which cryptos to trade, how much risk you want to take per trade and how to manage your positions.
A trading plan allows you to better manage trading risk and get more consistent results.
3 reasons why you should have a trading plan
There are many reasons to have a crypto trading plan, not the least of which is the extra support it offers you.
1. Trading becomes easier
A written plan makes it easy for you to trade. A detailed plan includes your trade entry requirements, the risks you are willing to take per position, your risk/reward ratio, trades to avoid, and more. Having all of this in place can also help you reduce stress and make more rational decisions.
2. Performance measurement
Because your trading plan includes various technical tools and strategies, as well as basic metrics that you want to factor into your trading decisions, it can help you assess which strategies work best under which conditions.
By following your plan and documenting it in your trading journal, you can also evaluate and refine your trading decisions to improve them.
3. Trading discipline and precision
Following a trading plan makes you more focused and helps you execute trades with more precision. In addition, following your rules will save you from impulsive trades and gambling.
Because 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 that you need to carry out when creating your trading plan
Define your trading goals and approach
Your trading goal needs to be specific, measurable and realistic. For example, the goal could be to increase the value of your portfolio by 6% over the next six months. With this in mind, you can define your trading approach.
You can use your trading targets to set conditions such as: B. how much time you are willing to devote to trading, whether you can combine trading with regular work activities, how to keep up to date with what is happening in the market and much more.
Define your trading strategy
A proper trading plan should include your trading strategy. For example, you should determine whether 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 want to risk. It is advisable to define your risk limit and stick to it strictly. While we cannot give a definitive risk management rule, we do not advise 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 balance. Before entering a trade, you should define your profit target. Traders typically use a profit target of 1:1.5 to 1:5, and some aim for even more. Suppose you risk $25 on a trade and expect to receive $75 in 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 on your desire.
Define the markets or conditions you want to trade in
You cannot trade all crypto markets. Aside from being impossible, each behaves differently from the other. So trying to get exposure to many markets at the same time might confuse you.
You can specify the market you want to trade by choosing specific cryptocurrencies you want to focus on or have a market configuration you want to trade consistently. Whatever it is, remember that the secret to a successful trading plan is to follow the routines consistently.
Document your trades
Keep a trading journal documenting 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 the reason and the result. 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 and detailed note that provides a step-by-step approach to trading. It could also be a small note covering the cryptocurrencies you want to invest in, the terms of investing in them and how much you are willing to invest. What you choose depends on your needs; Just make sure you don’t act without a plan.
A trade plan is still in the works. While we don’t encourage you to change your plan on a regular basis, we also understand that adjustments may be needed from time to time. The crypto market is dynamic and you need to adapt your plans to market conditions. Likewise, a change in your financial goals may require a change in plan as well.
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 provide trading or investment advice and does not advise to ever buy or sell any cryptocurrency. Always conduct your own due diligence and consult a licensed financial advisor for investment advice.