A trading plan is a blueprint that will outline a trading strategy. It also includes a set of rules that must be followed in order to implement that strategy. This is one of the first things that beginning traders should do. This advice has a problem. Beginning traders have no trading experience and are often lost in trying to create a trading strategy.
Trading plans are also problematic because beginners are taught to take their plans as gospel and not to stray from them. This makes it difficult for traders to adapt their strategies and rules in order to improve their performance. This is an important step in any trader’s learning curve.
Instead of thinking of your trading plan as something you have to adhere to from the beginning of your trading career, but something that can be modified as you gain more experience, consider it a living, breathing document. This article will show you how to create a trading strategy that guides your trading without limiting your progress.
Here are 7 points to consider when creating your trading plan.
1. Markets – Which markets should you be focusing on? Make sure to be as specific as you can – if trading stocks, which stocks should you focus on?
2. Timeframe – How long are you going to hold onto your positions? Are you a day trader who only trades for a few seconds or a swing trader who holds trades for several days?
3. Time Period – When will you trade? There may be other responsibilities that keep you from trading for the entire day. You can choose which hours of the day work best for you.
4. Your Trading Style – What would you describe as your trading style? Maybe you’re a momentum trader who focuses on trending stocks. Maybe you are a specialist in one sector. This can and will change as your experience grows and you learn from your experiences.
5. Risk Management Rules – This is an essential, yet often overlooked, a component of your trading plan. How can you manage your risk on both a per-trade and an overall basis? A “stop trading” point is a dollar amount that you can use to force you to quit trading if your trading volume drops below that amount.
6. Mentor – Who can you learn from and follow as a mentor? Trading alone is not only difficult but also lonely. It ignores the wisdom and experience of others. Either you repeat the mistakes made by other traders and hope to learn the lessons and techniques they have, or you can learn from the successful traders and avoid the initial frustrations.
7. Learning Process – How do you organize your learning as a trader’s trader? How can you ensure that you are always improving? How should you organize your trading journal?
Trading Plan Example
1. I trade the U.S. stock market, focusing on volatile stocks that have sufficient volume. These stocks are often the focal point of news articles and therefore “in play”.
2. I trade day and can hold positions for as little as a minute or as long as several hours. I am a scalper and seek to profit from short-term imbalances between demand and supply. As long as I can see a supply/demand imbalance, I’ll stay in a trade.
3. Although I trade all day, I tend to focus my trading activity on the open and close.
4. Although I can do many things, I consider myself a momentum trader who relies on tape to determine favorable risk/reward situations in order to move in the direction of a trend.
5. My risk management is a top priority. Each trade I enter has an established stop-loss. I also have a daily stop loss to stop trading when it gets difficult.
6. I have had many mentors in my career. Now, I am able to talk with traders from my firm who share similar trading styles.
7. Every trade I make is reviewed and I am always on the lookout for ways to improve. This could be as simple as reducing my risk in trading certain stocks or changing my execution patterns.
A trading plan is as simple as a series of statements that answer seven questions. Your trading plan should not be complicated as it will change over time.
Although your trading plan will help you to clearly define what you want, it is not a set of rules. Your plan will evolve and change as your trading skills and experience improve.
A trading plan doesn’t have to be complicated and spans multiple pages. It is enough to identify the markets that you will trade, the trading methods you will use, and the timeframes for each trade. Your trading plan will help you succeed in trading by clearly stating these 7 key points.