Components or Contents of a Trading

Published by Sharekhan Education | June 25, 2022

.Components or Contents of a Trading

Fahim Ansari | Sharekhan Education

In the previous two articles, we have seen the importance of a trading plan, why a trader must have a trading plan before they start trading and misconceptions about it. A solid trading plan will help you make logical trading decisions and avoid making decisions based on your emotions or impulsive trading. We will now venture into the components or contents of a trading plan. Some essential components of a trading plan are:

Why do I trade?

This is where you understand your motivation for trading. If your answer is to make a lot of money, and that is the only goal you are trading for, then you are preparing a recipe for disaster. Capital and loss management should be your main focus, as this can create circumstances where profits can be generated.

Who am I as a trader?

Here, you will define your strengths and weaknesses. What are you better at, and what is the worst? What are your strengths, and how will they help your trading business, for example, how can I maximize my strengths? What are your weaknesses that could potentially threaten your trading, and how to overcome these weaknesses?

Targets

The goal is one of the essential components of a trading plan because if you don’t have a defined goal, you will just be circling the bush. Goals can be long or short-term, but your goals need to be realistic; for example, I want to earn ₹ 5.00,000 every month from a capital of ₹ 50,000 which is not practical. I want to buy a Ferrari initially from my trading income, which is not initially possible; this could be a part of your long-term goal. Your short-term goal may be buying an SUV.

There may be financial goals such as the amount of money I am looking to make on an intraday, monthly or yearly basis. A goal such as beating Nifty50 returns or increasing the value of your portfolio by 20% per year.

Risk management

Trading is a risk-reward (R: R) game, as investing is a return on investment (ROI). The most crucial thing in trading is your risk-reward, which defines how much money you will make on a trade. Before starting to trade, it is critical to determine an individual’s risk tolerance or risk appetite – that is, how much risk you are willing to take for a particular trade and trading as a whole. It is possible to lose more times than you win and still be consistently profitable. It all comes down to reward versus risk. The higher the risk-reward, the more money an individual will earn on a trade.

Strategy

A trading strategy is a step-by-step process of how to analyze a trade. Here at Sharekhan Education, we have a solid 6-step process for analyzing a trade. A systematic approach to pre-market routine to analyze the broader market, place an order, be filled and trade until exit, types of orders an individual can use for entry and exit. Following this strategy with rock-solid discipline can give an individual a high probability of trading.

Education

You should start investing in your education and study as soon as you determine what type of trader you are. Make lifelong learning a priority, as everyone has a different approach or style that cannot be imitated. You can also invest the money earned from trading in advanced courses and continue to hone your trading skills.

By Enrolling in this stock market course, a learner can learn the various aspects of trading in Futures and Options