Creating a Trading Plan: How to Plan Your Trade and to Trade Your Plan

Most traders fail in their trading not because they cannot trade, but because they do not have a clear and concise trading plan. A trader without a trading plan is like a general without a battle plan, and in both cases disaster is practically assured. A trading plan is important for one simple reason: it will streamline the trading process and eliminate a lot of guessing and confusion on the part of the trader when trading.

Most traders fail in their trading not because they cannot trade, but because they do not have a clear and concise trading plan. A trader without a trading plan is like a general without a battle plan, and in both cases disaster is practically assured. A trading plan is important for one simple reason: it will streamline the trading process and eliminate a lot of guessing and confusion on the part of the trader when trading.

Markets, like battlefields, can be an extremely confusing place when everything is in full swing. Traders are constantly subjected to an avalanche of data, market swings, and volatility spikes during the day’s price action. In order to have a better grip on what to do and how to react to certain market conditions or trade set–ups, a trader must know how to establish and follow the rules of his trading plan, not only if he wants be a successful trader, but also if he wishes to remain a consistently profitable trader. The markets are littered with the bones of “one trade wonder” traders.

When it comes to creating a trading plan, a trader must know what the plan is going to include and what needs to be left out, because the plan must not only be useful, but remain concise. A large plan will most likely hinder the trader’s ability to follow it in the heat of the trading day. One of the cornerstones of implementing a successful trading plan is to keep it simple and to the point. Sometimes it helps to break the trading plan into subdivisions according to different market types and trading conditions. 

The following is a set of rules to help create a successful trading plan:

Rule #1

Always state the amount of capital that will be used for trading in the beginning of the trading period. That way you can keep track and compare your trading performance during the period. A trading period is unique to the individual and can be daily, weekly or monthly.

Rule #2

State the markets and instruments that you trade consistently (i.e. Forex, futures, stocks, options, etc.).

Rule #3

State the goal of why you want to trade the markets, be it a set amount of profit or desired ROI. Without a clear goal it’s not advisable to trade.

Rule #4

Always write down your market reminders. Reminders can be about market observations, such as price behavior during news or volatility spikes, or about traders own emotions and behavior and how to control it

 

 

Rule #5

Write down your money management rules, such as how much risk you are willing to take when establishing a position, then reference these rules when unsure of a trade.

Rule #6

You always need a clear reason for entering a trade: a trading set–up must be present and you must have these set–ups outlined in a trading plan. This particular rule is subdivided further into additional rules.

Sub Rule A:

Identify whether it’s a trending or ranging market

Sub Rule B:

Upon establishing a market condition, decide which trading strategy is appropriate.

Rule #7

Know at which point you will exit the market. When you enter the market, there are three possible outcomes: a gain, a loss or a break–even. Again, here are some sub-rules to this advice:

Sub Rule A:

Identify your stop loss level.

Sub Rule B:

Identify your profit target and establish a risk/reward ratio.

Sub Rules C

Know when it is important to breakeven and save your capital for the next trading opportunity.

Rule #8

A “disaster scenario” must always be present, because no one can predict the market and periods of extreme volatility that occur on occasion. Such a scenario should include what needs to be done when technology malfunctions, your trade stop is not being filled, or what to do when something else extreme and unlikely happens (e.g. a terrorist attack or a natural disaster).

Rule #9

Every plan you writes should have following statement printed on the top and the bottom of the plan:

I will follow this plan and will look it over before and after each and every trade.

In order to be successful, you must constantly adjust and modify your trading plan, keeping what works and discarding the rest. Follow these rules and you are giving yourself every chance for success.