What’s in a trading plan?

The starting point is deciding what kind of trading would suit you best. For instance, day traders will never hold a position overnight and are likely to trade multiple times during a session. They are constantly watching the markets to spot short-term trading opportunities and may be in and out of a market multiple times in hours, or even minutes. They will be quite happy to risk $50 to make $50, operating on a low risk : reward ratio. Day trading is certainly exciting, but also time-consuming. So, it’s not for everyone.

In contrast, trend traders may keep a position open for weeks or even months. They study charts to identify a major trend in a market, whether up or down. Then they look to trade in the direction of the trend until there’s an obvious change in direction.

Traders XN are similar, although they are prepared to initiate trades that go against the underlying trend, hoping to profit when markets correct after a significant move. Both would hope to make maybe three to five times as much profit when compared to their risk.

Meanwhile, position traders are really long-term investors. They tend to ‘buy and hold’ company shares, looking to build a portfolio and reinvest dividends. They don’t trade on margin, so they don’t employ leverage. Consequently, spread trading and CFDs are of little interest to a position trader, unless they’re looking to hedge an existing position.