Capital Management and Trading Plan - Crypto Academy / S4W8 - Homework post for @ lenonmc21
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Hello Steemians!
I hope you are doing well in your life. I hope you are keeping your health in this pandemic as first priority. So this is my homework post for @lenonmc21. The topic today is Capital Management and Trading plan. So, let's get started.
Define and explain in detail in your own words what is a ‘Trading Plan’?
TRADING PLAN:
Crypto trading is not a child's play. It involves a specific set of skills and with that comes the rules and regulations too as the rules and norms help a human being better at something and help be cautious. These precautions are essential, that's because if the necessary ones are not taken into account, can lead to massive losses.
The trading plan is basically the rules and regulations an individual sets for him/herself to get better at trading and to always be in profits. Cryptomarket is very vulnerable to crashes and volatility and necessary measures should be taken into account if one wants to succeed and become the ultimate champion of the trading world.
A trading plan as it is set by the trader itself is not comprised of hard and fast rules that must be obeyed no matter what the conditions are, contrary to that a trading plan can be quite feasible and flexible. A Trading plan helps you determine what you are investing, what is its value, and what you're willing to lose if the odds are not in your favor.
The basic sets of measures that must be included in a good trading plan is the analysis, a risk to reward ratio management, capital management, and a set of external rules that can include the psychological and mental states, etc., that enables a trader to be better at trading overall and control himself by making sure that the rules are not made to be broken.
A trading plan helps in formulating a predefined strategy based on your trading style that when certain conditions are met or fulfilled, you can take the appropriate decisions whether to enter or exit the market, where to place the stop losses and take profits, what types of orders should be made for which trade. It helps minimize the risk and maximize the profit.
The last thing would be the control over yourselves to obey and follow the rules that you've established and not take any decision based on your sentiments and emotions or in a hurry or when all the demands of rules are not met, it is always better to let an opportunity pass and not fall prey to FOMO.
Explain in your own words why it is essential in this profession to have a "Trading Plan"?
IMPORTANCE OF A TRADING PLAN:
The importance of a trading plan can be reflected alone by the fact that it provides discipline and develops a sense of real-world work by providing a schedule that must be followed. The presence of this fact alone depicts the value and significance that a trading plan has on one's life.
Just to depict the importance of the above-mentioned issue: Crypto trading or cryptocurrency-related work isn't considered real work in my country and it's not regulated as much. Only the youth has the basic knowledge about the word "cryptocurrency". So, the point telling you all is that the "trading plan" helps resolve this issue and creates a schedule and disciplinary model for every day and develops a sense of real work among the surroundings.
Not just to talk about the psychological but, a trading plan has its perks technically too. Some of the importance and significance of a trading plan are as follows;
Helps in establishing a schedule by determining the days and times to trade. How many trades to take in a specified interval of time.
Helps in managing your investment and portfolio, the risks, and helps in planning and controlling.
Helps minimize risk and maximize profit if used correctly.
Helps in determining the entry and exit points in the market and which type of order to use for which trade. Helps in the setting-up of the stop losses and take profits
Helps in the future trading the most as it's all about knowing when to book profits and when to place the stop loss or otherwise your account may be liquidated.
Helps in maintaining a controlled conscious.
Helps in making the right decisions and helps in the formulating of trading strategies.
Helps in developing a sense of real-world work.
Helps to remove the sentimental decision-making capability that is in the form of fear and greed in the market.
Gives you time to recharge, socialize, play, spend time with family etc.
Explain and define in detail each of the fundamental elements of a "Trading Plan"
FUNDAMENTAL ELEMENTS OF A TRADING PLAN:
As mentioned earlier, a trading plan can be flexible and can be set-up by the trader according to his/ her own feasibility but there are some of the basic elements or key factors you can say that help a trader develop a good trading plan. You can make amendments but these fundamental elements remain constant, namely;
Risk Management operates in a way that you predetermine the trades you'll be taking in a specified time interval, let's say one day for the sake of understanding. The number of trading positions you open in a day and when is the time to stop trading for the day is determined by the risk management.
- For example: You can open 3 trades in a day. If those 3 trades are successful you stop the trading and end your day. Let's say if one of the trade is not successful which you've already determined by proper risk management that on one unsuccessful trade you'll stop the trading and end the day too.
This helps in the protecting of investment capital by calculating the amount that a trader can lose. This is done by setting-up the proper risk management. A trader must not risk which he/she can't afford to lose.
The amount of money that you're risking must not be greater than the amount of money that you're making.
Capital Management is not only an essential element in the trading world but it has it's own perks everywhere investment is involved. It helps the investor manage his capital investment and make the right investment decision at all costs. Anyone who has the basic knowledge on investing will never ever risk his full capital on a single investment.
Capital management in trading is done by specifying a certain percentage of your full capital that you'll risk on each trade. To determine the trading style and to know whether to enter/ buy or exit/ sell here is essential too. At beginner level the percentage of your capital that you should risk on each trade is 1%.
- For example: You have a total capital of $2000. The percentage that you'll be risking on each operation is 1%. So, it makes $20 for every trade that you'll make.
The "percentage of losses" determines the amount that you're willing to lose on each trade while the "profit percentage" is the risk-reward ration (RRR) depending on which you place your stop loss ad take profits which for beginners is the ratio of 1:1 but you can further expand the area of your take profits to 2:1 and 3:1 to maximize profits with minimum risks bust it requires high expertise on the technical knowledge on the price movements.
I myself use the 2% rule to manage my capital which gives me more buying power.
The Trading Psychology comes into play both ways that is when you're losing too much or when you're gaining too much. Psychology is interesting as the human nature is vulnerable to it and no matter how hard he/she tries falls prey to the sentiments and make emotional decisions based on fear and greed.
Psychology of a human being says that when he's in profit he becomes greedy and let's the profit go up and way beyond the calculated take profit limit and due to the highly volatile nature of crypto market experiences a sudden downfall in the price which ultimately results in loss. The same yet the opposite goes for the fear.
This element helps in establishing the external rules to maintain a discipline and practice self-control as these are the key factors in becoming a successful trader. Control over ourselves no matter what the conditions are is what separates the successful traders from the unsuccessful one's. Patience and keeping your nerves calm in any situation is the ultimate key.
- For example: A set sentimental and psychological external rules could be,
- Not falling prey to FOMO
- Regularly checking the fear and greed index
- Don't trade when too excited or don't trade when too depressed or experiencing a loss
- Don't trade overtime
- Develop a healthy routine and give time to family and friends.
The Planning and Control of the Trading Account is very important as in trading it is significant to keep a record of your capital, the amount that you're investing etc. The Trading Plan that you build is important to keep a record of the percentage loss, profit percentage, no. of trades and the maximum trade loss or profit on which you should stop trading for the day.
The trading plan is built on Microsoft Excel or Google Sheets or anywhere the trader feels comfortable. The main component is the consistent following of the trading plan and make the entries on time whether daily, weekly or monthly.
Build a “Trading Plan” and cover all the basic elements discussed in the class. For this, you should NOT take the examples that I put in my class (Including the example amounts), use your own examples and your own images to make said plan, you must also base this "Trading Plan" as if you were operating on the platform of " Binance ”, taking into account that the minimum amount of exchange or investment is $ 10.
Risk Management:
The no. of maximum entries I will take in a day will be 6
I will stop the trading day after 2 unsuccessful trades
I will stop the trading day after 4 successful trades
Capital Management:
Capital I'll use is $500
Percentage loss loss will be 2%
Profit percentage will be 4%
Trading Psychology:
Don't be too greedy and always take profit on the specified limit.
Don't be too fearful to miss out and always make the decision when every measure is completely met.
Don't be over excited.
Don't take decisions when happy or angry.
Operate in the day time and keep the time after dawn to socialize with family and friends.
My Trading Plan
made on designcap
The capital that I'll invest in the first month is $500 with 2% daily loss and 4% daily profit with 20 operating for days.
At the end of the first month I'll cash out my initial investment which is $500 and $400 remaining profit will be the capital that I'll invest in the second month with compound interest formula which means the final capital of the previous time interval would be the initial capital investment for the new time interval.
CONCLUSION
The conclusion of the whole lesson can be seen above in the trading plan that I've built that how $500 went straight to $11757.31 only with the help of correct trading plan, maintaining a schedule and time, managing the capital and risk and being disciplined.
Cryptocurrency is a fancy word for many with everyone being excited about it and seeing dreams to become millionaires overnight but the ones that know the ins and outs of crypto trading know that it's not possible. Hence, we can say that it's a complete profession and requires determination and dedication toward it which can only be achieved by discipline.
Crypto trading requires specific set of skills to generate consistent income from it. And all this is possible by using the correct concepts and tools to trade.
Thankyou for reading through
cc; @lenonmc21