Transaction plan is a well-defined strategy of expectations and risk management in the market with the aim of efficient trading. At the beginning a career, a plan may not be of utmost importance because the trader is still learning the market. If at all a new trader develops a plan, it will probably involve copying signals from expert traders; let us call a beginner transaction plan.
It comes to a point in a trader’s career when copying signals and following other professional traders can be said to be substandard. After trading with the help of a professional trader for a while, it is expected that a trader should have gathered some experience and understand the place of difference in market views, unique thought process, market experience, and risk tolerance level. At this point, a trade is expected to develop his/her own transaction plan with respect to his/her unique trading preferences.
WHAT IS THE NEED FOR A TRADING PLAN?
A famous adage has it that if you fail to plan, then you have planned to fail. That is the summary of the essence of a trading plan in the career of a trader. In simple terms, a plan is the map of all the processes involved in a trade. A trading plan addresses what should be done in a particular trade considering the circumstances surrounding that trade. It also makes special reference to when a trade action should be carried out for anticipated favourable outcome of a trade, and how it should be carried out.
A proper transaction plan should involve risk management strategies to help minimise risk exposure to trades; something that is inevitable in the market. It is a fact that one of the risks in the market is the biased nature of human beings which makes it unsafe to trade the market profitably. These biased judgments are as a result of natural emotions and sentiments exhibited by human nature in issues related to finances; and which are not good for trading the market. As a result of this human nature, the need for transaction plan cannot be overemphasised. It can remove any bad decision-making at the heat of the moment if the trader is disciplined enough to stick to his/her trading plans.