Putting Together Your Binary Options Trading Plan

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Putting Together Your Binary Options Trading Plan

What is one of the first things that you need to do when setting up a business? Well, you construct a business plan. Prior to starting to trade binary options, you will actually find it quite useful to create a trading plan for yourself.

This is a step that many traders skip, choosing instead to dive headfirst into the action. While putting together your trading plan may be a little time consuming and yes, even tiresome, it is nonetheless quite necessary. Consider this plan as your road map for your binary options trading career.

Instead of feeling lost and bewildered, you will be able to follow a well-thought out and detailed design. Here are some of the tips that you can follow for setting such a thing up:

Follow Your Nature

Binary options trading, as with any form of investment, entails a certain amount of risk. Still, there are traders that choose to exponentially increase the level of risk involved. There are several ways to do this. For instance, the traders may choose to go against the trend or may require their trades to satisfy a greater number of conditions. The advantage of such trades that if you are right regarding your prediction, you stand to make a greater amount of money. At the same time, due to the complexity of the trades, you are more likely to lose the money.

In order to decide whether you are going to play it safe or risky, you should consider who you are as a trader.

It can be unnerving for someone to go against their nature, even in a financial situation. It is best to stick with the route that you are comfortable with, even if you feel as though you will make less money as a result.

Ensure Diversity with Assets

As you aware, deciding on the assets that you will trade with is one of the most significant decisions you will make. If you are just starting out, you don’t have to choose too many, although a variety is good. Any experienced trader will implore you to stick with what you are well versed with or at the very least, what you like. This way, you will not have to force yourself to be interested in your assets.

There is one more thing to think about, however, and this is diversity. In the financial world, diversity is a tool that is used to make sure that you don’t lose all of the money that you have invested in one fell swoop. You can ensure this by choosing assets that often behave in an opposing manner given any market situation. Let’s take currency and gold, for example. Whenever currency loses its value, it is almost automatic for gold to increase in price. If you invest in both these, you will stand to gain the money from one asset that you have lost with another.

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Create Records of Trades

There is something to be learned from every trade that you place, regardless of whether you win or lose. This is why you should make a habit of noting down every trade that you make. Include all of the details included in the trade as well as your reasoning behind your decision.

This should be done because it all adds up. You will be able to look back on this record and be able to see if you are making any recurring mistakes. Or, perhaps you have come across a strategy that is performing particularly well within certain conditions.

The last thing to keep in mind is that you should revise your trading plan ever so often. One plan is not going to hold up for long and you will need to make adjustments and improvement. This, in conclusion, is what you need for putting together your trading plan.

Trading Concepts: Creating a Trading Plan

Start a business, you need a plan. With no direction or planning for how you’ll make a profit, your business likely doomed. Trading is no different, if you want to succeed, you’ll need to think of trading like you would a business. After all, through your research, skills and ultimately your money you’re making an investment in yourself, which hopefully will produce consistent profits and the lifestyle you desire. This doesn’t happen by accident (at least not often). It happens by creating a plan for your trading, and outlining exactly how you will trade. Creating a solid plan is a key step that all beginning traders should take, as failing to do this will likely result in simply failing.

Creating a plan leaves your emotions out of trading. When you watching your trade turn into a big loss or a big gain your mind can spin, causing you to deviate from the original strategy you had in mind, if you had one. The trading plan takes care of this. It gives you methodical instruction on exactly how to handle each trading situation should arise. It also tells you how to handle multiple trades. As a trader you may want to make more than one trade, but because you are anxious about your other trade you decide to skip out on a good opportunity. Alternatively, you may take on too many trades, exposing yourself to too much risk. A solid trading plan not only tells you how and why you are making trades, but also how you will handle a number of trades (if you so choose).

Probably the main benefit is that when you follow a plan you see what works and what doesn’t, and can monitor your results. Random trades, where you just buy and sell for any reason that strikes you, provide no useable feedback, because yours wins and losses will be as random as the impulses that generated the trade. Only by following a plan can you see if the strategies you are using actually work, or not, so you can make calibrated adjustments to improve.

Before You Begin

In order to create an effective trading plan, you need to consider several things thing before you begin:

  • What style of trading best suits my personality? If you are someone who is low-key and prefers little drama, then you will likely want a trading style that is more in line with swing trading or investing. If you like action, then align your trading style with a more active style of trading such as short-term/day trading.
  • Are you going to trade binary options, stocks, forex, futures, or a combination? Each has advantages and disadvantages; pick your markets(s) so you can create a plan for that market(s).
  • What are your objectives? Why are you trading? Simple saying you want to make more money isn’t clear enough. Define what you want to make, and why–buy a car, buy a house, pay for kids school, etc. Your trading plan is the plan to get there, based on your resources, trading style and how often you trade. How often you trade will likely be determined by the entry and exit rules for your trades.

There are many excellent trading strategies out there, or you can create your own. Some basic entry methods are covered in my recent article Capitalizing on Lower Highs and Higher Lows in Price. Once you find a strategy you like, use this section of your plan to outline exactly how you will enter trades based on the strategy.

Your entry rules outline what market criteria must be in place for you take a trade. Here are some questions to ask yourself to get started. Does an indicator need to reach a certain level to take a trade? Does the price need to break an important level? Do entry signals need to occur on a specific chart, such as a 5 minute, 15 minute, or hourly chart. Do all trade signals get traded, or will you use a filter to screen some trades out? Do you enter exactly when a criteria is hit, or do you wait for a price bar to close before entering?

Think about your strategy, and then formulate exactly how you will enter those trades. If you use multiple strategies, this process must be done for each individual strategy.

How to get out of a trade is arguably more important than how you get in, since your exit is where you make or lose money. Therefore, your exit rules must stipulate exactly how you get out of both winning and losing trades based on your strategy.

If you are trading binary options, your profits and losses are fixed and therefore this section may be quite brief, since your broker essentially exits your trades for you. If you trade other assets, this section can get quite extensive.

You’ll need to determine where you will place a stop-loss order–an order which will close your trade and limit the amount you can lose. Where the stop-loss is placed must be determined before any trades are made, because without it, you don’t know how much you are risking on the trade. Once the trade is in motion, you may choose to implement a trailing stop. A trailing stop moves with your trade, reducing your risk or potentially locking in a certain profit once the trade moves in a profitable direction.

You’ll also need to outline if any profit targets will be used. Profit targets are pre-established price level or percentage-return levels at which you close your position (or part of it) to realize a profit.

You may choose another exit method, such as exiting simply when the criteria that got you into the trade disappears. If you entered because a trend was in place; when the trend breaks that could be your exit.

Outline your method for exiting profitable and losing trades, in fine detail, for any scenarios that may arise.

Money or risk management is the most important aspect of the plan. A basic rule for money management is that you shouldn’t risk more than 1% of your trading capital on a single trade. This is why you must determine your stop-level in the Exit Rules section. Once you set a stop-level, you know what your risk is.

Once you know your risk, you can determine how many contracts or lots you can buy. Managing your position size is crucial, as buying too much can create additional risk, while buying too little may make it difficult to reach your objectives.

In this section also consider whether you can take on multiple trades, or only one at a time. If you take on multiple trades, can they be correlated? If two assets are highly correlated, and you buy both of them, you are essentially taking the same trade, and doubling your position size. Consider these factors, and outline exactly how you will manage your money, risk and positions in order to reach your objectives.

Creating a trading plan will take time, but is well worth the effort. It should be very detailed, and at absolute minimum contain the sections discussed above. As you trade, things you didn’t consider will occur, and you’ll need to go back and tweak your plan. Once your plan is profitable though, avoid tinkering with it. The point of the plan is make your trading systematic, so you see what works and what doesn’t. If you constantly change the plan it won’t have time to show you if it is really working or not. Take the time to make a plan, because lack of planning leads to trading failure.

How to Write a Trading Plan for Binary Options

If you serious about a business, you need to have a business plan. If you are serious about trading, you need a trading plan. Before you invest any of your hard-earned money, you need to create a trading plan which you will follow each time you trade.

A trading plan is one of the most important tools in trading.

Every Forex trader must have a trading plan, this is also the case with binary options trading, and any other type of trading. In this article we will look at how to write a trading plan for binary options.

Consistently successful Forex traders say that

As a trader, you are faced with two options: follow your trading plan to the dot, or fail miserably.

Here are the main reasons why using a trading plan is crucial. A good plan will help us to:

  • define short term goals and overall direction,
  • focus only on clearly defined set of rules,
  • control our emotions so we don’t over-trade,
  • enforce trading discipline,
  • increase our confidence as a trader.

In a nutshell, your trading plan should be your complete guide on how you are going to make money in binary options. If you think a plan is not required and that you can memorize and remember all the rules as you swing it, all the best to you. There are many geniuses among us, perhaps you’re one of them. For the rest of us, following a trading plan will do wonders. So here are the basics that need to be included in your plan.

Trading system is the key ingredient of your plan

In order to have a reliable trading plan it needs to include a winning trading system. The system should be tested for at least a month and produce profits before it is included in your trading plan. Your trading system can be first tested on a demo account and once successful it should also be tested on a live account.

Information about your trading system must include the following:

  • time frames that you will trade, for example, H1, H4, D1
  • the maximum amount or percentage you will risk per trade, e.g. 3% of capital
  • the signals or/and entry rules that you will follow meticulously
  • expiry times and take profit options

Example:

I will only trade the London/US overlap sessions between 10-12 am (New York). I only view H1 charts and all my trades expire in 2 to 3 hours. I only trade in the direction of the trend. I wait for a confirmed signal on my MT4 trading platform and then enter a trade. I only trade 2% of my entire trading capital on each trade.

Additional notes:

If you don’t have a trading system that you can use, you might consider subscribing to trading systems developed by professional traders. Here are few examples.

Outline your daily trading routine

Your daily trading routine should be included in your trading plan because it will help you understand your trading patterns but also optimize your day.

The last thing you want as a trader is to constantly think about trading and having missed good opportunities. This can literally drive you and your loved ones crazy. Checking your trading charts and results every 10-30 minutes can quickly turn into a very ugly habit and it usually doesn’t help much.

Your daily routine should include indication of:

  • times of day when you will analyse the markets
  • times of day when you will place your trades
  • times of day you will make notes in your trading journal
  • times of day when you intend to check the markets for results

Example:

I will look at the charts and analyze the market each morning between 10-12am. I will only do this for a maximum of 2 hours. Within that time if a trading opportunity presents itself I will place a trade. I will check the charts and the trading results when I finish work at 8:30pm. I will only do this for maximum 30 minutes.

Remind yourself to stay cool and in control

As cliche as it sounds your trading plan should also include some points that will activate your ‘trading mind’ which should always be calm and relaxed. Trading with emotions can drain your account very quickly so it is very important to remind yourself not to cloud your judgment with emotions and desires.

In this section you could include a checklist which will put you in the right trading mode:

  • I will only trade on a confirmed signal and not make guesses
  • whatever happens I will keep my emotions in check
  • I will not chase trades or try to make up for a lost trade
  • after each lost trade I will walk away for 10 minutes and drink some water
  • I will turn each trade into a learning experience and learn from my mistakes
  • I will never trade when I’m angry, upset, or feeling low

Additional notes:

You can also add pictures, music, or videos to your plan for additional inspiration. Some traders like to play inspirational videos and music before each daily trade session. Motivational speeches and meditation help to focus and get into the right set of mind before trading begins.

Apply strict money management rules

Money management is one of the most important aspect of trading. Strict money management rules need to be part of your trading plan as well as your overall trading strategy. In binary options money management is easier than in Forex trading. However, this is not to say that there is nothing to manage. Your money is your money. You need to be in control of your losses and winnings and monitor your account balance each time you trade. A word of advise is that you should not spend more than 5% of your trading capital on each trade.

List your short-term and long-term goals

Take some time and think about what you want to accomplish as a trader. This is also quite an important step.

Your goals should include short-term as well as long-term goals and they should not only be about money. You can make them quite personal. Try to answer the following questions:

  • Do you want to make a living from trading the markets?
  • How much return can you realistically expect each month?
  • How much time do you want to work each week?
  • How will you become more confident in trading?

Log every trade you make in Trading Journal

A trading journal is crucial if you want to become a better trader. It can be separate from your overall trading plan but it should be viewed as an integral part of it. Based on your journal entries you will be able to measure the results of your trading plan and make the necessary adjustments.

The best way to log your trades is to take a screenshot of your trading chart after you make a trade. Write down the details of the trade (asset, chart, direction, expiry, result) and describe the conditions which led you to take this particular trade.

After each month of trading with your trading plan and trading journal you should study it all in detail and try to identify your weaknesses and strengths. Focus on improving your trading habits and adjust your plan as necessary.

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