HOW TO BUILD A TRADING PLAN

Most new traders will know they’re supposed to have a trading plan before they begin trading. But many won’t know why or even what one is. In this article my aim is to explain what a trading plan is and what kind of information it should contain.

What is a Trading Plan?

Essentially, a trading plan is a contract between you and the markets. A business plan is a document that contains every possible detail about your business, including your product or service, cash flow, profit and loss, strategies, marketing etc. Likewise, a trading plan should contain every foreseeable detail about your trading business. including strategies, risk management, markets you trade, watchlist management, diversification etc. Your trading plan, although covering all bases should be as short and concise as possible. Mine, covering a few strategies is one side of A4.

Holding Yourself Accountable

Your trading strategies should have an edge when a strict set of rules are met. These rules will be in your trading plan. Although it may sound easy to remember a set of rules, when money is on the line and emotions come into play it can be incredibly easy to break or subtlety change those rules. With them written down and constantly reminding yourself of them they become harder to break. Of course accurately following your trading plan rules takes discipline, but having them written down will make the chances of success far greater.

However, if you have a proven strategy with no trading plan, over time you may bend the rules of this strategy when money is on the line and you start taking your first inevitable losses. As these rules are broken, your strategy then becomes different to that strategy you knew was profitable. So how do you know these new set of rules even work? Likewise with risk management, you may start wanting to risk 1% per trade. But without this contract between you and the markets that risk may start creeping up when you get impatient or when you get greedy with a winning streak. To sum up, a trading plan is there to keep yourself accountable to the markets and ensure consistency in your trading.

What Must be Included?

The most important information to have in my opinion is risk management. Below are some things to consider around risk:

• How much risk per trade?

• How much risk per day?

• How much risk per sector?

• How much risk in correlated Forex pairs?

• How much overall risk exposure?

• When do you make your trades risk free?

• How many times will you compound?

• Are there certain market environments where you’ll be trading with reduced risk?

All of the above need serious consideration when you’re developing or learning a new strategy. They are all personal preference dependent on you own risk tolerance. Nobody enjoys losing money, but realistically how much are you willing to lose in one go? If you can’t sleep at night with 16% of your account at risk then drop your total risk exposure to 10% or less.

Money at risk must be money you’re willing to lose.

Strategy Rules

I’m fairly dynamic in my approach to the markets because I have a few strategies to suit a few different market conditions. It doesn’t matter how many strategies you have. All the details should be listed in your trading plan, as succinctly as possible. Below are some things to consider in this part of your trading plan:

• Exact rules where your edge is met

• What time frames do you use?

• Do you make decisions end of day or intraday?

• Are you entering on a breakout or pullback?

• If a breakout how to you find your exact entry price?

• If a pullback are you entering at support with a limit order or from support with a stop order?

• Which indicators does your strategy use and what values need to be met to take a trade?

• What are your exact confluence of events to enter a trade?

• Where is your initial stop loss placed?

• Is your stop loss based on the volatility of the market or trend structure?

• Is your initial stop loss your exit or will you tighten stop losses on breaks of support or resistance?

• How will you trail your stop loss? or will you use a take profit target?

• When will you compound if at all?

• How many times will you compound?

Not all of the above is necessarily relevant to your strategy but they’re all worth considering.

Watchlist Management

Watchlist management was something I didn’t give much consideration when I was first learning to trade. Over time I learnt how important a regularly updated watchlist was. (Here is an article on when I build my watchlists). When there are strong trends happening in the stock market, there could be hundreds of potential trade candidates that meet your trading plan criteria. So how do you identify the best of the best to fit into your overall risk allocation? Below are some ideas of how to find the best opportunities to trade:

• Which is the best performing sector?

• How high is the volume of the stock? Is volume greater than average on breakouts?

• Is there strong support or resistance between your entry and stop loss, thereby protecting your stop loss?

• Has price formed a strong base for a trend to develop?

• Are there any gaps in price? (gaps up in a bullish trends show strength).

• How linear is the current trend?

• How neat is the trend history of the stock?

• Is price at an all time high? (I opt for all time highs because there is no resistance above price, except psychological numbers).

Personally I keep no more than four stocks per sector on my watchlist for any one strategy. I use a checklist and apply a score to each stock. The stock has to have a certain score for me to even consider a trade. Keeping a short, well managed watchlist means my trading routine stays efficient and I don’t have to sift through loads of stocks everyday.

See my set up below with my carefully managed watchlist to the left:

Miscellaneous Rules

Some other rules to think about that I have on my trading plan include:

• Do you take new trades before earnings or non-farm payroll (NFP) announcements?

• Which markets do you trade? UK stocks, US stocks, commodities, Forex, treasuries?

• What determines where you allocate your funds?

• How do you balance your portfolio? E.g how many fast moving trend vs slow moving trends do you trade within your risk allocation.

• Do you trade futures or spot/daily funded bets?

• Do you trade stocks under a certain price? (I personally don’t trade US stocks under $20)

• How old does a stock need to be to trade it? I.e how much price history do you need?

• Do you trade exotic currency pairs?

• What is your trading routine?

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A Complete Trading Plan

In this article I’ve given a lot to think about when creating your trading plan or developing your trading strategy. I could just give you my exact trading plan and strategies, but my trading suits my personality and lifestyle and wouldn’t necessarily suit you. That being said, if you have a clear answer to the bullet points above and you know your strategies have an edge, then you’re well on your way to finding success as a trader.

Remember, your trading plan is a contract between you and the markets and is there to hold yourself accountable to your trading. Focus on following your process, and the profits will come.

Time to Change?

If you’re currently experiencing some roadblocks with your own trading then we may be able to help.

Join our TG community where you can follow our swing trading process by getting access to our weekly watchlists, our real-time swing trading portfolio and much more. Our portfolio is updated in real time with exact entry and stop loss prices, as well as full transparency with out exit and risk management.

This community is designed to help those wanting more insights into how we trade the markets and to get real results of your own.