How to create a trading plan on eToro?

A trading plan seems to be a very basic thing in your trading process and yet because it is so simple many traders overlook its great importance. A trading plan should be a solid framework on how and when to execute trades, the size of positions, levels of stop-loss and take profit, the kinds of assets and markets traded, rules for trading and so on. Of course every trader can make a plan suited best to their needs, but there are a few general things you might consider.

Goals and objectives

This seems to be a simple question, but do you know what is your motivation to trade on eToro platform? If it is to create a perpetual stream of income, you might consider investing into assets with a stable growth pattern over time, such as the ETFs or value stocks, copy other traders/ portfolios or perform position trading with a long timeframe. If you are looking for short-term profits and you are confident in your skills, you may consider day-trading with assets who’s prices are relatively volatile.

You should also then consider how much of your capital you can dedicate to trading and how much losses you can bear, since trading is a risky activity, especially if you rely a lot on leverage. But also ask yourself whether this amount you dedicated is sufficient to achieve your goals: perhaps trades that are too small in size would not be able to generate profitable results in time. You can also consider your strength and weaknesses in trading to assess how prepared you are to place real capital at risk. Do you often place or exit positions out of fear or greed, unable to control your emotions? In this case trading strategies and styles with a very fast pace may be difficult to perform. Considering what kind of goals you have, your risk aversion, strength and weaknesses in trading should help determine what type of a trader you are and what kind of trading strategy suits you the best.

Trading strategy

Trading strategy is a framework that helps you to define a set of rules for trading, the type of financial instrument you will use, indicators, exit and entry conditions and so on in your trading process on eToro.

Assets traded

You of course need to consider what assets and market you will be trading on the platform. eToro offers hundreds of assets under the following categories: stocks, ETFs, currencies and crypto assets, indices and commodities; you can always filter them by type or industry/sector. Some of them are more suitable for medium and long-term investments, such as stocks and ETFs for example, and some for shorter frames, like currencies and volatile stocks. Remember also that there are certain fees attached to each of the asset classes on the platform; for example, there is 0 commission on stocks and ETFs, while there can be a spread charged on others, like cryptocurrencies and assets traded in form of CFDs.

Trading style

A trading style mainly defines the time period trades are opened for. There are four main generally distinguished trading styles out there:

• Scalping: scalping involves making many small profits from minor price changes over many fast trades; this style involves solid exit rules to ensure that losses don’t wipe out your account quickly.
• Day trading: traders who do day trading open and close their position within the timeframe of one day; they keep a position open for several hours, on average, profiting from price changes within that period.
• Position trading: this type of trading ignores short-term price fluctuations and focuses on holding positions open over a long time period, several weeks, month or even years.
• Swing trading: the timeframe of a swing trader is somewhere in-between day and position trading, with a time frame of trades between several days to weeks.

Enter / exit rules and trade set-ups

After you have identified what kind of a trading style suits you the best it may be a good idea to identify your ideal trade set up. This could follow from a certain pattern on a price chart, for example, a consolidation pattern, price breakouts or pullbacks etc. An entry rule may consist of a certain price signal that you can identify, a certain minimum target that is above your level of stop-loss with a confirmation from one or two indicators.

There are many strategies for entry and exit in active trading as well as indicators that help determine best conditions for opening and closing trades. Many times traders focus a lot on entry signals in their trading and overlook signals that suggest they need to exit, often because they are unwilling to take a loss on a position if there is such. The simplest way to avoid that problem is to set a stop-loss level; eToro also allows to set a more flexible trailing stop-loss on your positions. A trade should also have a certain level of profit target which you can ‘lock-in’ using the take-profit option.

Which trading indicators will I use?

The choice of an indicator is the direct outcome of your trading strategy and trading style. Position entry rules should help you determine when to open a position and may include special price conditions or movements, patters on a chart, signals on the chosen indicator and so on; the same goes to trade’s exit rules. Often one or two indicators in combination can help to identify entry and exit conditions for a trade as well as the conditions of an ideal trade set-up. Trend indicators can help identify the direction and strength of a price momentum, range-bound indicators indicators can help identifying overbought and oversold market conditions, retracements signal how high or how low the price of an asset can go and so on. eToro offers plenty of various indicators for you to choose from, starting with basic trend lines and moving averages and onto MACD, Fibonacci levels, Ichimoku clouds and so on.

Many times traders who are overly focused on technical analysis of an asset overlook its fundamentals. Fundamentals of an instrument have all the power to create or change a trend, alter support and resistance levels and therefore strongly affect your trading process. This is especially important if you are trading over long-term periods, for example, in position trading, where both company-specific and global news affects the price of your asset. Some traders base their decisions on the fundamental analysis, some rely on technical and others use a combination of both.

Risk Levels

The amount of risk you are willing to take depends not only on the amount of money you are ready to dedicate to trading and maximum losses you are willing to accept, but also the type of asset you are going to trade and how volatile it is, how good your knowledge of trading basics is and how well you sharpened your skills. Depending on your trading style as well as the degree of risk aversion you can decide how big each trade can be compared to your total portfolio; typically active day traders place somewhere between 1% to 5% of the total portfolio amount into a single trade. This ensures that if you make a loss on one of your positions you can try again the next day without having wiped out the entire account. Risk tolerance also affects the amount of leverage used in your trading; remember that leverage can help you to boost profits but can likewise amplify your losses and should therefore be used with great caution. Finally, depending on your personal risk tolerance you can choose your levels of stop-losses to restrict downside risks, like on the image below.

Performance targets

Before opening a position it may be a good idea to determine realistic risk-reward ratios and setting performance target is a popular tool in risk management; some traders would not open a position if it is unlikely to deliver the desired reward. This also includes your profit targets of course which you can re-assess every month or quarter; setting profit targets can also help you to determine stop-loss and take-profit levels accordingly, as well as limit the amount of leverage used for trades. It is important to be realistic on your performance expectations and be prepared to accept possible losses and periods of not such a successful performance.

Plan B and maximum losses

The last thing is something not many traders like to think about, which is what would happen if you are not achieving your targeted performance? If your strategy is consistently delivering losses it may be a good idea to go over your plan and reconsider the trading strategy.

The danger here is to have the temptation to change the plan as soon as there is a loss made. Your plan in fact should in fact account for possible rough periods in your trading journey. Revision of your trading plan can include general approaches such as your overall trading style and strategy to a more specific assessment of whether there are certain patters on the price chart that consistently lead to losses, are the stop-loss levels set correctly and so on.

CopyTrading

If you are struggling in finding the time and skills to trade on your own, eToro offers a unique innovative option of CopyTrading. You can either invest into a ready-made portfolio with a well diversified combination of assets or choose to copy positions of other traders on the eToro platform. Another good thing about this feature is that eToro does not charge any management fees for that. Remember that using the CopyTrading option does not immediately mean you are guaranteed a risk-free profit but it does spare you the time and effort by offering ready-made investments; don’t forget to monitor your investments yourself and reconsider in case of persistent losses.

Hopefully this article gave you a few ideas on the possible things that could go into your trading plan on eToro. Having a trading plan can help you maintain focus on goals, control emotions, stay disciplined and provide a guiding framework for the trading process. As mentioned at the beginning, traders customize trading plans to their own goals in trading, adjusting the length and complexity to what suits them the best. Remember that trading involves capital loss risks and enjoy trading on eToro!

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eToro is a multi-asset platform which offers both investing in stocks and cryptoassets, as well as trading CFDs.

Please note that CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 67% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.

Past performance is not an indication of future results.

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