Capital Management and Trading Plan - Crypto Academy / S4W8 - Homework post for @ lenonmc21
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Introduction
Planning is very crucial in whatever we do in life. The most important phrase I've ever heard is that If we fail to plan, we plan to fail. Before setting out for anything, it is much better to plan ahead in order not to fall out of shape. In a profession such as trading, the importance of planning cannot be overemphasized. This says because any normal person will know that in a volatile market such as the cryptocurrency market, it is important to be cautious of the uncertainties that accompany the market and take every necessary steps to avoid losses. A trading plan will help a trader to trade with guide in order to avert losses and maximize profits.
1. Define and Explain in detail in your own words, what is a "Trading Plan"?
Trading plan is a set of intended actions which a trader is expected to follow in order to achieve desired results. It is a detailed plan containing the trading strategy, capital management strategies, trading psychology of the trader, risk management strategies as well as the conditions to enter and exit the market.
A typical trading plan may contain trading days and hours, the profit that would be made daily, monthly or per trade as well as the estimated losses. For a trading plan to be effective, traders must be sure that the respect every detail and operate based on the plan. If the market is not favorable enough, a trader is expected to refer back to the trading plan and act according to what the plan says.
Let's take for instance, if I want to take five trading positions in a day, according to my plan, I'm to win all five. In case the market isn't favorable, if I lose two, I exit the market. Once I make profits with the five trades, I'm expected to do as my plan says and exit the market for the day. On the other hand, the moment I lose the second time, I'm also supposed to exit the market.
Trading plan in a nutshell help traders to have a trading direction and not operate blindly, thereby managing their resources well.
2. Explain in your own words why it is essential in this profession to have a "Trading Plan"?
Having a trading plan is very essential. Unlike every other activity and profession, trading is very risky especially in the cryptocurrency market. Entering the market without a proper plan will do a great damage to the trader. Some reasons why it is important for a trader to have and make use of a trader are discussed below.
Constant change in prices: The prices of digital assets do change more frequently. This is why it is important to have a trading guide that will help minimize risk. In case the outcome of a trade is not what was expected, the trading plan will tell you what to do to minimize losses.
Control of Emotion: When traders win some trades, they turn out very excited and want to still enter the market. Most times, the outcome is often bad. Likewise, when losses are made, they always want to enter so that they can take revenge. All these are avoided with the use of a trading plan.
Discipline: A trading plan also allow a trader to be disciplined in whatever action he or she is taking. This is very important in the trading profession.
Resource Management: A trading plan makes it easier to manage resources and not risk all of it. It also takes care of the capital staked.
In all, trading plan is like a trading guide that saves traders from making mistakes that will take them back to square one.
3. Explain and define in detail each of the fundamental elements of a "Trading Plan"
1. Risk Management:
Risk taking is something you do without really understanding what the outcome would be. This is the number one characteristic of trading. Once you commit your capital into buying an asset without knowing if the price will rise or fall in the next moment, you are taking a huge risk. This alone should be something to make traders have a trading plan.
A trading plan enable traders to have a strategy that would make them manage their risk appropriately. Setting a number of trades you want to make in a day, and the conditions that will make you stay or quit, is a way of managing risk. This is one of the basic elements of a trading for plan.
Since the market is full of uncertainties, risk management provides a certain degree of assurance that even if there is an opposite outcome, only a bearable amount of losses would be made.
Risk management has a target for each day, and once this target is reached, a trader will have to stop the trade for the day to avert the unseen.
2. Trading Psychology:
This include the DOs and DON'Ts a trader sets for himself to guard his mind and emotions. The way we reason may not be the same with others. That is why different traders have different trading psychology. I chose to talk on this first because it entails our emotions and reasoning when it comes to trading.
A well drafted trading psychology will not only allow a trader have a smooth trading, but will also follow a long way in eliminating all the casualties and mistakes that accompany wrong motives as well as trading with a destabilized mind. There are lots of trading psychology that traders set for themselves.
Examples of trading psychology
Trading psychology of traders could look like the following;
- Trade during morning hours
- Trade only when you're happy.
- Do not trade when you have issues that sweep you off balance.
- Trade only four days in a week.
- Do not try to revenge the market no matter what happens.
- Stick to your trading plan and never deviate.
- If you're sick, take a break and rest.
3. Capital Management:
No matter how fun trading is, we cannot risk all our funds. But how much of your funds are you willing to risk in the market trying to trade? This is what capital management is all about.
A trading plan must contain the risk percentage as well as the profit percentage. If a minimal percentage of your capital is risked, it will not really affect the trader.
Let's take for instance if a trader's capital is $200 and he or she can afford to lose $10 (that is 5% of the capital), it is reasonable enough to bear. This means that the trader will be cautious and sure that he doesn't exceed what is in the trading plan. You can now see that capital management is another important component of the trading plan.
Another important factor of capital management is the profit ratio to loss ratio. The profit must also exceed the losses such that as you progress, the profits can be added to the capital for further trading. This must be strictly followed in order to properly manage the capital.
Trading account Planning and Control:
This has to do with keeping record of our transactions and doing everything necessary to manage the account well. We have to ensure that the capital is increasing and the account is growing.
Our trading plan must be precise about the days of trade and the expected profits for those days. A 3:1 profit and loss ratio wouldn't be too bad for the account. An account that profit exceeds the losses is however a successful one. Every trader must strive to keep the trading account in good shape and also record the details of every transactions. This will help manage and control the account.
4. Build a “Trading Plan” and cover all the basic elements discussed in the class.
I built my trading plan based on the Binance exchange which minimum capital is $10. It covers a period of six months. There are 6 columns in the plan. The first column shows the number if months while the second shows the number of days I'd be trading in a month. The third column contains the capital for each month while the fourth column is made up of the expected profits. The fifth and last column contains the expected losses.
My start up capital is $200 and I expect to make at least $1 a day. I'll be trading for 5 days in a week, so for a month, I'd have a total of 20days to trade. For now, I will stick to just one trade in a day. At the end of the first month, I will be left with a 10% profit, that is $20. The total expected losses for a month is 3%. This means that in the first month, I expect only $6 loss. This $20 profit would be added to the initial capital to make it $220 for the following month. The process continues for the period of 6 months. At the end of 6 months, I'd make a total of $154 as profit.
table made with Microsoft word
Risk management:
In order to manage my risk, I'd be making just one trade in a day. No matter the outcome of the trade, what is in the plan is what I'll stick to. Also, I choose to trade just 20 days in a month. The remaining days are safe days for my funds.
Capital management:
The maximum expected losses for the month is just 3% of my capital. This is what I can afford to lose. In the first month, I'd not lose more than $6. This is a very reasonable amount. If I take one trade in a day, I'll configure my analysis tool such that stoploss is being set to this percentage. This way, I'll not really be affected by whatever becomes of that trade.
Trading psychology:
I have my own DOs and DON'Ts that I follow for seamless trading. First, I don't trade when I'm sick. If I try to, I might get into more trouble. Secondly, I trade when I'm in the right frame of mind. If anything is troubling me, I don't trade. Thirdly, I visit my trading plan before any trading is done. Fourthly, if I'm emotionally destabilised, I don't trade. Lastly, I will never try to revenge the market because if I try to, I will be doing myself more harm than good.
Account planning and control:
I keep record of all my trade and also add my profit to my capital to help grow the account. If there are any mistakes, the records will help me never to repeat such mistakes again.
Conclusion
With all that has been established in this class, it is important to have a trading plan and operate based on what it says. If we are to take three trades a day, two is not enough and four is excessive. Sticking to the trading plan will help in curbing losses and maximizing profits.
Thank you for your time.