A trading plan is a structure, or a set of guidelines, to define your trading or investing business. There is no holly-grail trading plan or strategy because every trader is unique, and different styles suit different people. However there are certain components which when added to your trading structure can help you be successful and consistent over the long-term.
KEY ASPECTS OF A TRADING PLAN
1. Write it down.
You should physically write down – or type – things like your reasons for trading and the key objectives that you hope to achieve. This will help you organise your thoughts, as well as giving your plan solidity.
2. Record your progress.
Develop a clear and concise method of recording
your trades. It is critical in planning a long-term strategy to be able to view your past and present trades, both from a learning perspective but also to keep track of which markets you are, and have been, exposed to.
3. Control your Capital.
Money management is a third crucial element of any trading plan. You need to have a plan for managing your investments, especially your exposure to risk.
SET UP STRUCTURE FOR RISK MANAGEMENT
Risk can be quantified in advance, through applying a scientific approach to assess whether a particular trade is low risk or too risky. Your general risk-per-trade scale should ideally look like this:
Low risk: 1-2% of total equity
Medium risk: 2-5% of total equity
High risk: More than 5% of total equity
Reckless: More than 20% of total equity
As an example: With a £10,000 account, a 3% risk amounts to £300 on a single trade (medium risk).
KNOW YOUR ENTRY & EXIT POINTS BEFORE ENTERING A TRADE
In many, if not most, cases, the timing of your entries and exits will be the most stressful and thought-over parts of the entire trade.
At these times, there is an elevated risk of basing a decision on an emotional response, rather than strategy. For this reason, it can be extremely helpful to establish clear entry and exit criteria and rules to stick to.
For example, you might use charts to track certain market trends, and commit to only entering a trade when particular patterns have emerged. Alternatively, when considering your exit, you might establish profit/loss limits to stick to as the position develops. It can be very helpful just having a set of guidelines that you have established in an emotion-free environment, away from the pressure of an ongoing trade.
MAINTAIN YOUR DISCIPLINE & FOCUS
The financial markets can move rapidly at times, and it’s at these moments that you could quickly find yourself overwhelmed and more prone to rash decisions. A trading plan is a vital point of reference in these situations, because you have made a lot of your decisions beforehand, in anticipation of the dilemmas you might face. Act according to your plan, rather than make many actual decisions on the spot.
A trading plan can help to take the emotion out of your trading. Some people may attribute victories to emotion, or gut feel, but long-term success will almost always find its foundation in a considered strategy compiled beforehand.
ALWAYS APPLY MONEY MANAGEMENT & EVALUATE YOUR TRADES REGULARLY
A trading plan often includes a trading log or diary, which you can use to track all the trades you have made and make notes about their success or failure. A trading log is an excellent tool for viewing the bigger picture. In one snapshot you can get an overview of your trading history and identify successes and mistakes made along the way. Honesty and self-awareness are important traits here, but constant assessment of your trading is one of the best ways to avoid repeating mistakes and remind yourself of the things that have worked in the past.
KEEP YOUR TRADING SIMPLE BUT NO SIMPLER
A trading strategy can be a constant reminder to you of your goals and also your self-imposed limitations. Having a written plan is extremely useful in maintaining your trading discipline – it just always seems much harder to deviate from your original plan when it is clearly laid out in front of you all the time. Keep it on your desk or stick it to the wall, if it helps.
KEY ELEMENTS TO INCLUDE IN A TRADING BUSINESS PLAN
Most trading plans typically contain certain important elements. These might include such things as: