A trading plan is the compass or any trader’s map. A professional trader has a complete trading plan where he exposes when, how and why will you open a position.
also know how much are you willing to risk, for how much money are you going to enter the market, what factors will need to come together for you to see the potential of an entry. How you will manage your positions and even when it will be time not to trade.
In this article I want explain what elements a complete, winning and professional trading plan should have so you can do yours and don’t let your trading become undisciplined and emotional.
What is a trading plan
The trading plan is set of guidelines that define our operations. It tells us how to act against a series of predefined guidelines, which allows us to test and estimate the results that we are going to obtain in our operations.
It is like the initial project for a new company. It will help us estimate the performance of our operations appropriate to our risk profile and time dedicated, being very useful when assessing the viability of our investment objective.
It is important to keep in mind that in order to profit from trading it is not enough to have a winning strategybut we must also be able to describe said strategy in method formwith clear entry and exit rules and a filter, accompanied by an adequate money and risk management.
trading consists in the management of the probability. With our trading plan, it is conceivable that, by persisting in it, and without deviating a millimeter, we will end up obtaining positive results.
In our trading we should tend to the coldness of not falling into any type of emotion, being totally strict of the trading plan. The ability to resist all the temptations that come along with your trading plan is the key to achieving consistent and lasting success.
Why is it so important to make a Trading Plan
The main idea of the trading plan is to develop a set of rules to follow. Once you have these rules written, it is much easier to put them into practice, since you will have a clear plan of action for your daily operations.
Our trading plan can avoid making spontaneous and irreversible decisionssomething that is especially useful when emotions start to come into play.
The trading decisions you make are part of a trading plan template and have a previously determined objective. Thus, have some rules to follow that eliminate any subjectivity in your operations It allows you to better manage your emotions.
Our trading plan must contain the maximum number of operations that we will make per dayto avoid over trading, and if we do so know that we are breaking our own rules.
The trading plan means planning and order of the operation, but the most important thing are the rules, those that you must put and they will be sacred.
In trading, the Ego appears that tells us “what am I going to aim for, if I control”. If we pay attention to him, we will leave the operation in his hands and we will operate under a false sense of control. This is why it is so important to make a trading plan.
What you should take into account before starting your Trading Plan
As a trader you must create your Trading Plan where define your goals and be able to achieve them. You must bear in mind that the trading plan must pursue the following objectives:
- Set some rules to follow: you must develop a series of ideas to accept.
- Carry out a better analysis of the market to be traded and minimize errors: it can prevent you from making spontaneous and irreversible decisions. This often happens when we trade hastily or emotionally.
- Finding the best entry and exit times in the market: You must know what operation to perform during the trading session, depending on the scenarios that arise. For example: a high volatility news set.
- Help manage emotions in trading: the decisions in your operations that you make are part of a Trading plan template and have a previously determined objective.
- Avoid over trading: Traders can make spontaneous trading decisions, these decisions will in all probability lead to losses that the trader will try to compensate with more trades, even with a higher volume. Overtrade leads to losses, and losses to want to recover what was lost as soon as possible. This is a tremendous mistake.
- Help manage your risk: If you decide to open a position with a higher risk than the higher risk defined in your trading plan (1%-2%), including it in your trading plan helps you manage your other open positions.
How to make your Trading Plan (in 8 steps)
The only way to be successful in trading consistently over time is to work with a set trading plan.
To elaborate it, we have to work on the following 8 aspects:
1.- Time dedicated to Trading
We must take into account how much time can we dedicate to trading and what kind of trader do we want to beand based on this, we will define our dedication time and the type of operation that we are going to carry out (intraday, swing trading, etc.).
2.- Available initial capital
you shall take into account the capital with which you are going to have, Well, by joining this to your objectives and goals, you will be able to know what leverage to use or what size your operations will have, in addition to other aspects of your operations.
3.- Market selection
at the time of select the market in which we are going to operatewe must bear in mind that there are several types of financial products, the most common are: Futures, Forex, Stocks, Options, CFDs, ETFs, Commodities, etc.
4.- Platform and Trading Broker
There are many platforms where you can trade, everything will depend on the type of market you choose and also the financial instrument you prefer to use. If you want to trade Forex, the best known platform is meta traderwith which you can operate with a multitude of brokers.
5.- Monetary management
The money management adequate is extremely important, because it is what tells us the number of contracts that we can use in order to maximize profits while minimizing losses.
6.- Risk exposure profile
The risk assumed in the operation is variable for each investor and will be established taking into account the level of risk aversion. Now, it should always be within the limits set out below:
- I. Per operation: 0.5-1%
- II. Per session: 1-3%
- III. Monthly: 5-10%
7.- Trading Strategy
In this section you will detail as if you were going to explain to a child, what is your trading strategy? It details how a market entry opportunity occurs, where will you take profits, where will your stop loss be according to the maximum loss per operation, what are the risks and opportunities of the strategywhat is your routine before and after the operation, what are the requirements to determine that it is a good investment opportunity and what will you do after the operation (register operations, etc.)
If possible, post images of some trades you have made so that you always have in mind what the trading opportunity looks like.
8.- Record of operations and periodic evaluation of results (Trackrecord)
It’s fundamental keep as detailed a record as possible of our operationswhich allows us to evaluate our results periodically.
We will make a trading journal (Trackrecord) that this is a record of all our positionscan be done in a spreadsheet, where we record: the type of contract, system used, profit or loss result, number of contracts entered with each order and the sizes of the target and the stop.
Recording our operations allows us to constantly reassess the effectiveness of our operations, whether we are maintaining good results and whether we are properly adhering to the systems.
Example of a Trading Plan
I hope this article has solved your doubts regarding how to create a trading plan. Now, I am going to give you a very clear example on how to fill in your trading plan perfectly.
Next, we explain each aspect and data of a trading plan:
- initial capital: capital with which to start trading.
- Market: market in which you are going to operate (stocks, Forex, Futures, etc).
- Process of my operation: write the previous actions that you are going to carry out before making the first operation each day.
- Reliability target: percentage of winning trades.
- Risk per operation: percentage of the capital that we are going to risk in each operation.
- maximum loss: maximum daily loss that we are willing to assume.
- money management: capital management based on the risk assumed for each operation.
- Type of operation: timing of the investment (daily, weekly, monthly).
- Platform and Broker: which is going to be our financial intermediary or broker to issue our orders to the market.
- time frames: in what timeframe are you going to make your entries (5 minutes, 30 minutes, 4 hours).
- Operating Hours: what will be your hours in which to operate.
- Risk/benefit ratio: if we are going to risk €100, how much we want, at least, to win. At least it’s the same.
- entry strategy: standards with which I will enter the market.
- Exit strategy: standards with which I will go to market.
- Operational evaluation: review of our operations to make correction and analysis decisions.
Trading the financial markets can be a very stressful job. A trader who rigorously follows his plan in the market Forex is less exposed to this stress. This is because the element of surprise is limited.
When you have a trading plan, you will be able to measure, identify problems and failures and make corrections instantly.
By having a plan, you will be reducing the chances of losing trades. In addition, in front of them, you will be prepared for a quick correction.