Capital Management and Trading Plan - Crypto Academy / S4W8 - Homework post for @ lenonmc21
Hello, greetings to you... I'm glad to be partaking in this weeks post which was lectured by professor @lenonmc21 on capital management and trading plan and I would say it was quite interesting reading and understanding a lot which are the main criteria and necessities for positive and profitable trading, let's go over to the task without wasting much of our time.
Define and Explain in detail in your own words, what is a "Trading Plan"?
Trading plan as the name implies is simply the conditions and objectives a trader considers which are suitable to the trader before commencing trade.
Trading plans are plans made ahead of trading which includes the time, risk, and objectives convenient to the trader, what do I mean by this, when we talk about trading plans we look into the time most best for the trader, this is because the trader might have other social works, family, or a student. And with this thing occupying the mind and mental state of the trader, the trader’s plan towards making out time most suitable for them is what we call Trading plan.
The time most suitable for a trader without any hindrance or distractions is due to a well-planned idea which resulted in a perfect and suitable trading time which also is part of Trading plan
Also in terms of our capital which we use in starting up a trade, A good trading plan is when the trader puts in what he/she is willing to lose with no adverse effect.
With trading plans, traders make out all things in their favor, in the sense that every criterion vital for a successful trade before implementing a trade must be met to achieve a successful trade.
As I said earlier, this criterion can be the amount of capital a trader is willing to lose if the trade goes against their will, the time most suitable for the trader without further distractions from school, family, or other works.
The trading plan is like a timetable/worksheet and pattern a trader should make out and also not just making out, also being dedicated to it by following the rules and norms of the trading plan activities for risk and capital management.
The timetable I mean is for the calculative side of trading activities, in other keep tracks and records
Explain in your own words why it is essential in this profession to have a "Trading Plan"
Why wouldn't it be essential in having a “trading plan”?. Following my previous explanation of what a trading plan is and how it helps traders manage and grow their trading account, a trading plan is essential for all traders who wish to minimize the risk of losing their capital and maximize the growth of their account.
Trading plans help traders take trading seriously and as more of a business in the sense that they have objectives and aims to achieve.
The following are the importance of having a trading plan;
1 -Trading plans help omit totally, the rate of fear and greed emotions in the decisions a trader carries out in a trade.
2 -Enables traders into monitoring their trade performance, checking where they got it wrong, and adjusting to a better performance by keeping and following the right trading plan for risk and capital management.
3 -The trading plan in relation to science acts like a hypothesis, this hypothesis does not prove to be sure until after commencing/entering a trade. If peradventure goes the right way according to the traders' strategy, we would say that the trader has a good&profitable trading plan.
A trader's trading plan and patterns go in line with the outcome of the trade. This is why it is advised, that traders make a good trading plan not just for the sake of having a trading plan, why did I say “A good trading plan”? A good trading plan in the sense that the trader keeps to the rules and norms of their trading plan thus giving positive/profiting results.
Marking out each day of trading in a worksheet reminds traders each day of their performance, and help in making them ask “what is wrong”? with this, traders would tend to look at where they are getting it wrong and try to meet up and keep to all trading risk and capital management.
The trading plan is the first rule to trading, before making moves into researching and use of the fundamental And technical analysis.
For example, for an engineer trying to build a perfect, strong, and lasting house you must make sure the foundation is built strong and accurately, this is also related to making and following the rules and norms in risk and capital management for profitable and positive trading.
The trading plan is like the foundation of a house, where all other trading activities are determined by it.
Explain and define in detail each of the fundamental elements of a "Trading Plan"
There are 4 major essential elements of a “trading plan” which would enable us to achieve and acquire a positive and successful trade if we keep to them and they are as follows;
1 -Risk management
2 -Capital management
3 -Trading psychology
4 -control over the trading account.
The risk management strategy is one of the best trading plans which helps us in the control of our emotions in trading. If traders should be led by their emotions, it is directly proportional to the number of times they tend to trade in a day.
Traders with good risk management tend to be on the profiting side compared to those who let their emotions spoil or destroy their risk management strategy.
Risk management is the number of win (profiting trading) in comparison to the number of losses in a trade.
For instance, a trader agrees to a win to lose ratio of 3:2 respectively depending on the number of the trades he wishes to open, that means that once three positive tradings are achieved, the trader leaves the market for another day, and once two losses occur, the trader still leaves the market for another day.
This would help traders in the management of their risks in the market and also help control their emotions towards “revenge in trading” in terms of losses and also towards their “greed” In terms of profit.
Capital management strategy aids traders in dedicating the amount of capital or money they are willing to lose, this doesn't mean that you put in some amount of capital in other to lose, rather it is the capital you are willing to lose INCASE the trades go against your will.
Capital management helps traders in the terms of negative trading (lose) to still have some funds which could be used in other investments or to continue trading for the second time.
Capital management helps reduce the heartbreak in trading because it wasn't all of our funds put to it and also because it is the amount of capital we were willing to lose if anything should go wrong.
There are further analyses of capital management in trading and they are as follows;
loss percentage
profit percentage
days of trading
LOSS PERCENTAGE
The percentage loss is the amount of trader's capital the trader is willing to lose. These are all part of capital management, whereby a trader with a capital of $100 is advised to risk $10, a trader with $500 to risk $50, a trader with $1000 to risk $100. This would help traders manage their capital sequentially.
Once the loss percentage marked out by the trader is reached, the trader is advised to leave the market for the next day.
PROFIT PERCENTAGE
In other to ascertain a positive and growing capital/income in trade, traders are ought to have a higher percentage in profit than losses. Profit percentage determines the number of positive and profitable trades a trader makes per day.
It is advised to make double the profit per day to the losses made per day in other to have a higher profit percentage in our capital, what do I mean by this, Traders should always cover their losses by a ratio of 2:1 or 4:2 or it can be in a ratio of 3:2, or 4:3 depending on the trader's risk management strategy.
In comparison to the percentage of losses the trader can risk, the trader as well should bear in mind to achieve a profiting trade which should be at least double of what the trader is willing to risk.
For instance, if the trader is risking 2%, then the trader should be aiming to make over 3-4% in the market, even though the number of trades planned to be opened in the risk management has not been reached so far the trader has made the profit percentage marked for the day, the trader is advised to leave the market for the next day.
In other not to be overexposed to the market, risk management helps in limiting traders, much like a discipline a trader should have towards trading in other to make more of profit than losses.
DAYS OF TRADING
The days of trading are also a very important track to keep because it is the best time and days suitable for the trader. These are the day's traders make out for themselves which they see fit without any obstruction of social duties, family, school, or work.
Days of trading made out by a trader depends on the trader's purposes and aim for the day or week.
If I'm to use myself as an example, I'm to say that I do my trading mostly on weekend, that is, starting on Friday down till Sunday, and this is because I'm occupied with my studies on weekdays, so, with a lot of assignments and books to read trading weekdays would be a very bad plan and could affect my capital, so I made out weekends as my suitable days where I have nothing else to do rather than to focus on my trading.
According to the “American psychological association” Psychology is the scientific study of the mind and behavior of an individual. Psychology could be of a negative impact or positive impact to an individual, now in trading... Since traders are also humans, we have every tendency to be in the right psychological state or wrong psychological state.
Our environments can affect us psychologically, families as well, relationships, plans, and a lot more can be of effect on traders because aside from the world of trading we all have our lives to live and things to look out for. So when things go wrong it could affect our trading plan likewise when things are going right.
Traders have no psychological effect when trading in a demo account because it isn't real money neither is it their own money, so here no matter how the market goes it does not affect the trader.
Talking about real assets which traders make use of in the market, traders can be affected psychologically from one thing or the other in the market and also possibly the environment, but because of the discipline and rules made out in trading, the trader is advised to keep to same rules no matter how the market goes.
If we win a lot of profit from the market In as much as we have reached the number of profit percentage marked out for the day, we are advised to leave the market for another day and same goes to our losses.
Traders should avoid entering the market when they have the following challenges;
Not in the right state of mind.
Have works and tasks to do either in school or at home.
Discouraged or doubt about the day's trade.
Traders are also ought to try as much as possible to keep their “risk and capital management” no matter how it goes in the market.
A trader can never fix or apply risk and capital management that would be against him/herself. This is to tell/say that the reason for the “risk and capital management” is for the good of the trader, so no matter what, traders are ought to believe that this is for their good and benefit whether in good or bad times, why go against it?.
In good times in the sense that you leave the market with profit and in bad times in the sense that you leave the market without making more loss, you never can tell.
So with this, and the control of our state of mind and behavior we tend to make a good trading scheme, reducing our losses and maximizing our profits.
The control over our trading accounts comes with a strategic plan in which we tend to grow our initial capital month by month.
This helps traders in managing their assets month to month, whereby traders are meant to increase their capital every month from the previous earnings instead of withdrawing it.
The control over the trading account of the trader is the strategic planning and objectives of the trader. For instance, a trader who starts with a capital of $150 in month one, after successive trading following all the rules in “risk and capital management” could make a total of extra $48, which in month two instead of withdrawing any amount of the capital, the trader would start the second month of trading with the total of $198 which is the addition of the initial capital $150 + $48 which is the profit made from the first month.
This would give the trader a higher trading chance/opportunity in making more profits for the 2nd month because the higher the investment capital the higher the profits to be achieved if achieved.
This plan is to maximize our capital day by day and also as the months go by. It is called the “control over trading account” which means the way and rules to build and grow an account from the initial capital to higher initial capital and so on.
Traders are ought to meet up to the risk management strategy they make for themselves in other to have better and positive control over their account.
In the control of an account let's take for instance a trader who started with a minimum capital of $150, let's bear in mind that this minimum amount varies which is dependant on the exchange or trading site/app in use. For instance, binance makes use of at least $10 in carrying out a trade and so are other different exchanges with their different minimum amount.
As I was saying, a trader starting a trade with a minimum amount of $150 in the first month, makes a loss of 2% ($2) and profit of 4 ($4) per day, for a trader who trades on weekends, would make a total of $48 in that month.
This is a calculating experiment and in relation to the above explanation, I would use a few calculations to explain better
The trader made $4 profits each day of the 12 days of trading which is
$4 * 12 which is = $48
For a trader who trades on weekends as I said earlier, based on the fact that the trader might be a student, we have 11-12 weekends counting from Friday to Sunday in every week of the month.
So this would be;
The amount made from a single day multiply by the number of days of trade
$4 * 12 which is = $48
Hence, the trader made a total of $48 in the first month
So cumulatively, starting the second month, the trader would start with an initial capital of $198.
This is how a trader can control and grow his/her trading account.
Build a “Trading Plan” and cover all the basic elements discussed in the class.
Using my Binance account, I made a “trading plan” with a minimum of $150 and the image below depicts my trading plan/strategy for the past 6 months
Google sheet Screenshot
The above diagram I would be explaining in columns and this is how they work.
The first column depicts the months of trading
The second column depicts the initial capital I use in starting the trade in my Binance account, each month with a new initial capital, which will be due to the addition of previous initial capital plus total profit made per month.
The third column depicts my percentage loss of 2%. This column shows the amount (percentage) which I can risk which is dependent on my initial capital.
The fourth column shows my expected daily profits in relation to my initial capital.
The fifth column depicts the results from the 12 days of trading that I am going to trade, this is based on the 4% profit that I am expecting daily.
This is the multiplication of my daily profit in 12days.
This depicts my final capital which is gotten from my 12days of trading profit plus my initial capital.
Following the image for instance at the 6th column;
In other to get the final capital I will be adding my total 12days of profit with my initial capital which is;
In the first month
$48 + $150 = $196 (my total capital for the first month)
We would notice that in the first month my initial capital was $150, but at the ending of my trading for the first month, I made a profit of $48 which is cumulative to my initial capital of $150 I will be making $196.
The $196 I will be using as a startup capital (my new initial capital) For the second month.
The core reason for this accumulation of capital and profits is to make and achieve a compound interest which would be beneficial to us as time goes by.
As I have explained in my first answer about risk management, risk management is essential in checking out my results from my profit to loss ratio, this is to make sure I win more capital than I lose.
And here I made risk management of 4:2, whereby I leave the market after achieving 4 wins and also leave the market after making 2 losses.
Capital management determines how much capital a trader is willing to lose. In my capital management, under the following, loss percentage, profit percentage, and days of trading account I have the following statistics;
LOSS PERCENTAGE
In my loss percentage, I made out 2% as the percentage of capital I’m willing to risk for each day of my trading in the first month.
PROFIT PERCENTAGE
In my profit percentage, this shows the percentage result I’m to expect in each trade, and which I am to expect 4% profit.
This profit of 4% on each day of my trade will always be higher than my loss for the day in other to make a profitable result.
DAYS OF TRADING ACCOUNT
Days of the trading account is the day suitable to my conditions and plans and I made it to be on weekends which starts from Friday - Sunday.
This is in other to give attention to my lectures and perform my assignments in school during weekdays. So I have a total of 11 - 12 days in a month to trade.
1 -I will make sure that I’m in the right state of mind, with this I mean that I have nothing disturbing or keeping me tensed, For instance, my school results or some certain clarifications needed to be done in school. This could be very demoralizing and can affect one's state of mind. So I will make sure that I’m myself and nothing is bothering me to the point of keeping me tensed or distracted.
2 -I will make sure I have no assignment or homework to do because this could affect me if I’m to submit the assignments by Monday because I trade only on weekends.
3 -I will make sure I have no doubt or double mind in carrying out a trade.
4 -I will make sure I have standby electricity in other to keep my devices on and monitor my trading all day.
5 -I will make sure I have studied the fundamental analysis of the trade I wish to commence.
6 -I will make sure I’m investing with my capital and not borrowed capital. This is to avoid tension and panic in my trading because I might be led by my emotions towards going against my “trading plan”.
A trading plan helps traders in making a positive and profitable strategy in trading, as a result, aid in the growth and control of the trading account of the trader.
A trading plan which helps traders in risk and capital management gives traders a positive chance by minimizing their rate of losses from trade and maximizing the capital growth of the account.
The trading plan being the basics in trading and the foundation to strong and good trading should be in alignment with our emotional state, and we should try our possible best to be disciplined in terms of keeping and maintaining our trading plan without being deceived by our emotions.
All I would say is trading plan is like the foundation of all trade whereby all other trading activities follow.
Thanks to professor @lenonmc21 For this intriguing and inciting week course...
Happy break time!😁