Trading plan is a set of tough rules, you use to make key decisions in process of trading.
A smart trading plan allows you to reduce the risks which are feature of cryptocurrency trading, helps you to make well-informed decisions, use the best trading practices most effectively and gives consistent results.
For successful traders cryptocurrency trading is not a hobby, but a business in the strictest sense of the word.
When starting a business, a business plan is usually developed in order for the business to make a profit and to influence this process.
Trading, and especially cryptocurrency trading, gives the impression of an extremely chaotic environment. However, success depends on the planning of key decisions and actions here, as well as the strict implementation of these plans.
A trading plan is a set of rules which defines the basic principles of entering the market, exiting the market, calculating the volume of positions, defining goals, around which to open and close positions, the role of indicators in your perception.
If you change the market, make sure that your trading plan is developed and tested on it, do not use the old plan again. The reason for this is that all the markets are different and they work a little differently. To minimize the profit loss, it is important to work according to the plan for each different market, according to your individual strategy regarding how you are going to make profit.
Types of cryptocurrency trading plans
Not all the traders trade according to the plan; they make decisions manually and “on-the-fly” responding to information coming from the markets in real time.
This approach refers to the discrete type of trade.
The system trader relies on a set of rules for making decisions and can implement it through the automation of trading.
To start trading with a discrete plan, no preparation is required. Most traders are like this. They make decisions based on a combination of information and intuition, hoping to reach valuable markets with a high probability of making profit. Even using rules to guide the decision-making process, a discrete type trader can break them any time: decisions are made manually and the last word is always left to the trader.
System traders, on the contrary, fanatically follow their trading system. This type of trading relies on a fixed set of rules; it is perfect for automation. Their system is encoded into the trading software setup, and with the push of the “ON” button it performs all trade management. In contrast to the intuitive traders, the system type of trader relies on a consistent and well-developed trading plan, which eliminates the need to guess and creates consistent profits over longer periods of time.
Competent planning of deals in the long term brings regular profit. This part of your trading business is not easy to accomplish, but it is important to create a trading plan, and do it before starting a technical and / or fundamental analysis, and even more so before opening your first deal.
How to develop a trading plan for cryptocurrency trading: 6 elements
- Market choice: liquidity and volatility
- On which part of the chart you will make decisions
- Which indicator you will use to make decisions
- The volume of the positions to be used on this particular market
- Your market entry rules: trade filters
- Market exit rules
Market choice: liquidity and volatility
Market choice. Usually cryptomarkets are based on trading in BTC with other well-established crypto and fiat currencies, or with new coins, which have been just released after the ICO. Your task is to clearly determine on which markets you want to trade. This decision is based on picture of volatility and liquidity of the market - for sure you want your orders to be effectively executed regardless of their volume and not to cause disruptive price changes.
Factors affecting liquidity:
- Order execution speed
- Stability: how long does it take for the market to return to the nominal price after a large trading order was executed.
- Depth: the number of orders outside the best offers and demand
- Width: how wide is the difference between buy and sell orders
You can talk about good liquidity, when the market provides the trader with really tight spreads and enough depth for quick order fulfillment. This ensures that your orders will be completely fulfilled without significantly affecting the price and with minimal slippage of your budget.
Volatility shows how quick and deep are rises and falls of the price. Each change in the price is associated with the ability to make a profit; if the price remains constant, the probability of making a profit tends to 0%. You need some average volatility. If the volatility is too high, then the risks of losing trading capital increase; gaining trading experience in such complex markets doesn’t make much sense.
On which part of the chart you will make decisions
This is not the same as the trading style, which we describe separately.
These intervals can be based on different factors:
Which one you choose depends on your personal preferences and trading needs. For example, long-term traders prefer long-term charts, shorties - one and five-minute intervals.
The price action will be the same regardless of the selected chart - the difference is in the way of looking at the market. You can also use several intervals, the most important is to use the main chart as an indicator of entry and exit to the trade.
Which indicator you will use to make decisions
Technical indicators are mathematical calculations that describe the movement of the market and form forecasts for it. They are based on the past and current price or volume activity of a particular market. There are at least 4 basic types of indicators you can use:
- interpretation of trends,
- trading volume
To be honest, no indicator will give you 100% reliability, each has its own peculiarities. This is why we recommend to get familiar with at least few of them, and not to choose the first that is easy to understand.
The volume of the positions to be used on this particular market
Most exchanges allow trading on minimum order volumes. Balance the number and volume of positions for your tasks and clearly define the size of the positions.
You can link the volume of deals with the liquidity of the coin, its reliability and longevity of coin itself.
Your market entry rules: trade filters
Entry rules are directly dependent on the individuality of the trader. Some of us are aggressive, others are conservative. Conservatives miss good trading opportunities, aggressive traders risk entering markets prematurely and create good trading opportunities for others. It is important that these rules provide the tools for consistent, confident and decisive entry into the markets without breaking the price of conservatives, aggressive traders and even traders who consider themselves balanced.
To create entry rules, traders use trade filters.
These are the conditions that must be fullfilled to enter the market. The choice range is large: from the price threshold to the indicator values. In fact, they work as a security toggle for a trade trigger. The trigger is activated when these conditions are met.
Market exit rules
The old adage says, you can enter the market at any price and create profit exiting at the right time. They say it works.
Criteria for exit the market - the final, one of the most important aspects, which defines the profitability of trade. Therefore, it is worth spending at least as much time on researching and testing your exit rules as your entry rules.
Which criteria will you use to close the deal: These rules determine what is considered the result of your bidding:
- Achievement of profit targets,
- Closing at Stop Loss and Take Profit,
- Change of transaction strategy to the opposite one
- Just like in case of the rules of entry, it is important to determine which type of orders you intend to trade.
Take Profit: Set a target at 2% above the entry price, use a limit order.
Stop Loss: Exit when a loss reaches 1%, use a market order for guaranteed sale.
On traditional markets, one of the criterias is time - for example, the end of the day. In crypto-trading, the change of time zones of large markets has some importance: when the USA, Asia, etc. wakes up. This should be taken into account in the trade, but it is hardly advisable to rely on it when planning.
How to start creating a trading plan
If this is new to you, it’s better to focus on one market and expand as you gain trading experience, skills and confidence. In order to work in several markets, you will need to quickly switch between them, and this is a great amount of mental effort.
Decide what you can do, what you can master in the nearest future and gradually improve these skills.
Trading plans testing
After you creating a trading plan, you need to test it in order to qualify it as profitable or unprofitable.
The process of testing trading plans brings you closer to realistic estimates of the feasibility of future investments in trading.
This is an important step, but it is worth treating it as critically as all the others: it will give you an idea of how well you understand how the combination of aspects of your plan works, how changing one or another aspect will affect your trading. Backtesting is considered to be one of the basic tools for determining whether the plan will be successful in the future. You can use it in 3commas to check how certain parameters of the bot will work on the trading.
We found out that cryptocurrency trading is not a hobby and not a roulette, but a business in the purest form.
Cryptocurrency trading is fairly easy to get into, especially in the pursuit of big profits, but not everyone becomes a competitive trader who is able to understand the market and make good profits.
You can become one only if you are willing to spend time and energy on learning information and acquiring the skills necessary to develop an effective, profitable strategy and become a professional trader.
Try it yourself, if it will be difficult, ask questions in the trading chat, offer your trading plans there for discussion: https://t.me/commaschat.
It is easy to load your strategy into automatic programs, since they strictly follow the rules, do not take emotional decisions, instantly consider, act without delay, and are able to insure a diverse set of risky situations on the chart. By the way, the algorithms of 3commas have a wider functionality than the stock exchange solutions, and a friendly interface for beginners: http://bit.ly/2qJoRMq.