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Having a solid, well-crafted trading plan is essential for market trading. It can spell the difference between market success, on the one hand, or — on the other — giving in to FOMO, forgetting to factor in vital information, or regretting a decision not to trade later. An effective trading plan considers your trading style, risk tolerance, as well as your understanding of market sentiments, clear entry and exit rules and trading spread. It defines you as a trader, providing a road map for the way you trade.
Whether you’re day trading, swing trading, shorting the market, or trading derivatives, formulating a trading plan is essential to identifying effective trades and capitalizing on them without anything getting in the way.
We’ll take you through a step-by-step look at how to formulate a cryptocurrency trading plan while covering all the advantages of this essential strategic framework for informed traders.
Key Takeaways:
A trading plan provides structure and discipline, helping traders avoid emotional decisions driven by FOMO or market noise.
It aligns trading strategies with goals, risk tolerance and analytics, allowing for better performance tracking and improvement.
Responsible risk management and organized market research help traders manage risk and stay focused on their trading approach.
A trading plan is a blueprint for trading that organizes your trading techniques and strategies into a logical framework. This framework makes it easy to assess the viability of trades and stay focused on your trading strengths.
Your trading plan is your map of risk, market focus, analytics and strategic approach. Every trader needs a plan to navigate cryptocurrency markets confidently. There are countless trading techniques, patterns, and strategies with successful track records, but only a few may suit each trader’s attitude, expertise and experience optimally. A trading plan hones your focus, keeping you motivated and targeted on the right trades.
Cryptocurrency trading plans are the type of financial product that requires meticulous research and careful forethought. Once a crypto trading plan is created, it shouldn’t change whenever there’s a bump in the road. The only time that a trading plan changes is if the trader uncovers a better way of trading — and that takes extensive testing and logging of successful repeat trades.
A trading plan empowers the focused trader by providing several benefits. From risk reduction to easing away fear and guarding yourself against greed, a good crypto trading plan may not guarantee success, but it certainly makes a significant contribution toward it.
Here’s an overview of the main benefits of having a crypto trading plan formulated around your unique approach.
A trading plan aligns your market engagement with your trading strategy. It gives you a controlled environment in which to derive measured results. This allows you to track your trading performance and goals while making adjustments to improve potential outcomes.
A good plan logs all of your trading positions and lists the specifics of your strategy. These details can include the type of technical analysis used and relevant fundamental analytics for each trade listed. In this way, it becomes easier to refine your approach and improve your chances of entering and exiting successful trades.
As management theorist and influencer Peter Drucker reportedly said, “If you can’t measure it, you can’t improve it.”
Using a crypto trading plan eliminates a great deal of stress that can accompany unprepared trading. Once you’ve created a trading plan, you’ll be able to follow the steps necessary to analyze price movements objectively.
Gone is the greed that far too often fuels high-risk trading. This lets you enter into positions confidently, thanks to an organized rule set that’s been formulated without emotions, haste, or irrelevant information getting in the way.
High volatility and fast news flow have a powerful impact on cryptocurrency markets. It’s easy to get wrapped up in market sentiment, losing track of your trading vision. This can lead to impulsive decision-making. A pre-written plan provides the focus to stay within the bounds of a thoughtful strategy.
“Pressure is what you feel only when you don’t know what you’re doing.” - Former Pittsburgh Steelers Coach — Chuck Noll
Every reliable trading strategy requires testing and adjustment before you can use it to forecast success. Testing calls for trading discipline, repeating promising patterns and indicators and entering in similar market conditions over and over. Only through trial and error and carefully assessing your trading journal will you come to know which strategies are golden.
A well-defined trading strategy involves comprehensive market research. With a continuously trading market, there’s very little time to stop and analyze market movements. Not only are you factoring in the constant flow of information supplied by fundamental analysis, but you’re also analyzing trading patterns, slippage, and risk.
The only way to stay organized is to have a specific trading plan devised beforehand. Ensure that your trading plan contains all the factors that you use to assess the viability of trades. These include market research criteria, news sources, and any other preferred indicators.
A trading plan prevents overtrading. There’s no way to avoid losing trades at some point. However, managing your risk per trade is a simple way to keep portfolio losses from growing exponentially. In the midst of a high-conviction trade, this discipline may prove to be difficult. You can’t expect to get the timing right every time.
Whether you’re following a fixed risk-to-reward ratio, sticking to reasonable stop losses, or limiting trades to a percentage of your trading capital, stipulating your policy for managing risk ensures that you trade responsibly.
Learn more: Cryptocurrency Hedging Strategies
Following a predetermined trading plan prevents you from trading during inopportune times. Trading impulsively when the market presents slim opportunities will quickly eat away at profits from your successful days.
The scope of trading set out in your trading plan frees up time for analyzing patterns and trading opportunities. Your goal is to trade when you know you have a statistical advantage backed by insight instead of wasting time and money.
Here’s a step-by-step breakdown of how to create a cryptocurrency trading plan that sets you up for the best chances of success.
Set out trading goals. This way, you’re motivated by (and learning from) all the small wins along the way to becoming a seasoned trader. Shape attainable goals bound to fixed, realistic time periods. With a 24-hour market, you may have to choose trading windows that make the most sense for you to track unless you’re using trading bots.
Take a look at your schedule and assign yourself daily trading periods based on how much time you have available to focus on. Certain trading styles will require more trading time than others, so weigh your options and availability carefully.
From day one, start logging your entry and exit positions in a trading journal. Use a spreadsheet stored online (in the cloud) so that you can access your trading activity from all your devices — and have a secure backup so that your data is never lost.
If necessary, take screenshots of notable trades to learn from later. Keep them in your trading journal as well. Logging crypto trading activity is the best way to test various trading strategies reliably. It also allows you to measure the effect of adjustments to your approach.
Find the type of analytics that grant you the greatest market insight and stick to them. Use comparative analytics like on-chain metrics, transaction count, active addresses, and even predictable socioeconomic factors from reliable news sources.
Note on paper or computer the methodology that works for you, and never stop refining your strengths. Many experienced crypto traders keep a spreadsheet of fundamental and technical metrics as part of their trading plan. This technique makes assessing trends and growth easy at a glance.
Unless you’ve tried out various trading styles, it can be difficult to determine which one best suits your approach and personality. If you’ve already tried your hand at trading, then you’ll know whether you prefer scalping, day trading, range trading, swing trading, trading positions, or inter-exchange arbitrage.
Scalpers hold trades for seconds to minutes at a time. Day traders trade within the span of a day, rarely holding positions overnight. Swing traders hold trading positions over a period of days to weeks following trends, while position traders hold their trades for weeks, months, or years.
Notes on trading styles should also include fundamental trading rules you’ve amassed while trading. Keep a record of general guidelines for trading. For example: Not chasing anything in an uptrend due to the chance of retracement catching you. Or: Waiting for downtrends to break entirely before pouring your money into a coin. You might even have a goal of determining how much you want to stabilize your portfolio by using a percentage of coins like Bitcoin and Ethereum.
Every trading style and strategy will require a different holding period. As mentioned above, scalpers will hold trades for minutes, whereas swing traders may hold trades for days or weeks. You may find that longer trading periods make you somewhat anxious. If so, you’ll prefer to stick with shorter ones. It all depends on how you’re trading.
Your trading style largely defines your holding period. Therefore, specify the duration of your trading plan so that you’re always on top of your strategy and risk.
Focus on identifiable patterns that are based on your knowledge and experience. With a bit of time and practice, you can learn how to spot and use indicators like RSI, Bollinger Bands, Moving Averages, and Fibonacci Retracement, to name a few. Use the trading patterns and indicators that you understand and trust the most as your starting point, but never stop learning and adding to your arsenal as a new methodology presents itself.
List each of your trading strategies step-by-step, adding as much detail as possible. Set out a definitive list of each step it takes to open and close a successful trade. For example, a step-by-step trading strategy would note the current price of the cryptocurrency, the trading trigger for your chosen indicators, and your desired entry and exit points. This can apply even for minute-by-minute evaluation.
Choose the percentage of your portfolio that you’re willing to risk per trade. Always decide on an investment amount that doesn’t exceed what you’re willing to risk. Many traders opt instead for a risk-to-reward ratio to decide the value of trades. In this case, a risk-to-reward ratio of 1:5 would mean that risking $10 worth of Ethereum would potentially produce $50 of profit in a trade. Determine the trades that suit your risk tolerance, and note them in your cryptocurrency trading plan.
Develop your own rules to assign to your trading plan. Examples could include: Avoid more than three consecutive losses on the same trade. Cut your trading budget if you run two or three days of trading losses. Always set a stop loss that limits loss on your trades by the value of your portfolio you’re willing to risk.
Risk tolerance largely determines trading limits. Nevertheless, you can set percentages such as 5–10% of your trade amount to cut losses or 1% of your overall portfolio. Maximum loss percentages give you rules to follow when you might not otherwise have the will to lock in a loss. Risk-taking varies by traders and sometimes by market conditions or circumstances. If your portfolio has swelled 10x, you might naturally feel a bit more emboldened to increase trading limits.
Every crypto trader’s trading plan is uniquely personalized to their approach and strategies. Use our step-by-step guide to walk yourself through creating your own crypto trading plan.
To help formulate a trading plan like the example below, try to ask yourself these questions:
What is my motivation for crypto trading?
What are my short-, medium- and long-term crypto trading goals?
Which trading style do I have the most success with or grasp best?
How much time do I have available to trade?
What is my primary trading setup?
What consider realistic profit targets?
What holding period suits my trading style?
Which technical indicators do I know and use?
What steps will I take to mitigate risk?
Where and how am I going to keep track of my trades?
Here’s an example of what a real trading plan could look like after following our guidance.
Trading Goals:
Short-Term — Gain enough experience with swing trading and reading technical indicators to grow my portfolio by 15% during a maximum time frame of six months and reassess risk.
Mid-Term — Gain enough experience in momentum trading to grow my portfolio by 40% and begin trading cryptocurrency futures.
Long-Term — Once successfully trading futures, increase the risk to 3% of portfolio capital per trade, and reach a further 20% growth from the mid-term goal.
Trading Style: Swing Trading
Trading Hours: 8 AM–10 AM, 3 PM–4 PM local time
Primary Trading Setup: Momentum Trading
Breakout Strategy —
Use Moving Averages to find a cryptocurrency coin or token that’s due for a sudden uptrend
Enter into a position as soon as the coin or token breaks a pivotal point in resistance and set a suitable stop loss
Ride the uptrend and exit the trade before the trend loses momentum
Secondary Trading Setup: Retracement
Holding Period: One to Six Days
Cryptocurrency Selection Criteria:
Mid-Range Market Capitalization Under $10 Billion
High Network Value-to-Transactions Ratio (NVT Ratio)
High Relative Volume (at Least Twice Above Average)
Breaking News Concerning Cryptoassets
Cryptocurrency Road Map Milestone Progress
Technical Indicators:
Average Directional Index
Relative Strength Index (RSI)
Simple Moving Average Crossover
Ascending Triangle Pattern Checked With RSI & MACD
Risk Management:
1% Trading Capital per Trade
Maximum of Three Losses per Day
1:4 Risk-to-Reward Ratio
Traders are often attracted to cryptocurrency trading because of the large swings in the market and the potential for a quick profit, even short-term trading. Getting involved in cryptocurrency trading is also relatively easy, with powerful exchanges available to trade.
Take advantage of a cryptocurrency trading plan to assess the viability of potential trades. As you learn more patterns and indicators and find ways to improve your strategies, track them in your trading journal to see if they will work in your plan. A plan helps you focus and avoid getting distracted by all the shiny trading objects in the cryptocurrency space.
The key to using a crypto trading plan successfully is to stick to the trading framework you’ve created. You can adjust or expand it when your plan no longer serves you. Your plan can be somewhat fluid, as long as you are intentional and logical about the changes.
Former U.S. President Dwight Eisenhower said, “Plans are nothing; planning is everything.” While a plan is essential, planning your strategy also ensures that you take a thoughtful approach to trading. When large sums of money are on the line, you don’t want to leave anything to impulse and chance.
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