Developing a Trading Plan

Why Make a Trading Plan?

By all means read the proliferation of professional trading advice out there in forums and blogs - BUT BE YOUR OWN TRADER!  Develop your own trading plan and update it as you gain more experience and stick to it.  As we've seen in Module 7. Managing Money, Exposure & Risk, rock solid discipline is a must in trading - deviate and you can loose money. 

So why develop a trading plan?  Treat Trading like a business, so your trading plan is your business plan - Your risk tolerance, psychology, expectations and trading system are all enveloped in your trading plan.  A trading plan should take the emotion out of trading.  It's a flow chart detailing every possible issue thrown at you, guiding you to the correct answer - A plan simplifies decisions.  It's 'hard and fast' rules are:
  • WHAT 
  • WHY 
  • WHEN
  • and HOW
Nb. You'll have noticed from the above paragraphs that "A Plan" and "A System" aren't the same.  A System is trade entry and exit. It's part of A Plan.  A Plan may have 2 or 3 Systems in it.

If you fail to make a plan you will fail as a trader.  First, you won't be able to make split decisions thus avoiding large losses and second you won't know where you're going wrong if it all goes pair-shape.  We can't emphasis this enough - MAKE A PLAN and WRITE IT DOWN!!!  You'll then have a better chance of making the law of averages work for you.

So What's in a Trading Plan?

Below we'll look at some of the things that should be put into a trading plan.  Modules 1 through to 9 have focused on these already, so you should have a good understanding of what's in your Plan.  
  1. Why are you Trading?  Is it a part-time activity, financial freedom, retirement, the thrill etc, can you make a profit trading full time?...
  2. What do you Hope to Gain?  This feeds off of No.1.  Is it money, the challenge etc... What are you monetary goals - 1% per week? 50 Grand a year?  Double my account in 1 Year?  No trading mistakes in a day? Be specific.
  3. What's going to make you Successful, where others have failed?  
    • How will you leverage this strength?
  4. What is your biggest weakness?  Fear of loosing Money? Too Confident etc...?
    • How will you overcome this/these weaknesses?
  5. How much time will you be devoting to Trading?  2 hours a week? 8 hours a day?  Stick to It!
  6. What is your time management plan?  How is your trading day set up?  
    • E.g. 6am to 9am - Research on markets - what are analysts talking about in forums, TV etc... What do the fundamentals look like, what's current market sentiment, what news & economic indicators are being released today & will they be big? Reviewing open positions - do they need adjusting?  What are the market correlations looking like?  Look at Charts for trending markets, key support and resistance levels etc...
    • 9.30 to 4.30pm trading with your trading system.  
    • Evening reviewing your day? 
  7. What is your Style of Trading - A day, swing or position trader? A combination?  Does this style fit with your timing?
  8. What markets will you trade?  24 hour Currency markets? Equities? 
    • Why are you trading these markets?  Your time & knowledge may affect your answer
  9. How will you choose your Trading System?  How will you research what system to use and how will you test it?  How long will you test it? What demo account will I use?  Average win to loss ratio to target? What is my average profit to loss target?
  10. What is your system?  What's your set up (eg. catching a trend), entry and exit criteria
  11. Your System Cont...  How will you Manage your Money, Exposure and Risk?   How much can I afford to loose?  How much will your account  starting balance be? What's the largest draw-down (the reduction of capital in a series of loosing trades) I can handle?  What leverage will you have on your broker account?  Will you add to your account if you hit a margin call?  Will you withdraw profits or re-invest?  Reward to risk ratio? Stop/Loss position? Will you trail stops? What determines your position size?
  12. What's Your Strategy Monitoring Plan?  How will you know when your strategy stops being profitable? Eg. average win to loss ratio still in place ,  Average profit to loss still holding? Will you tweak your plan?
  13. What's your strategy adjustment plan? Eg. Go back to point 9 and start again? Make small adjustments?
  14. What Trading Platform will you use?  Will you pay for software like MT4?  Will your broker have a good platform?  What web resources will you utilise? What's your back-up plan if your systems fail? 
  15. What broker, or brokers will you use and why?  Have they got access to the markets you want to trade?  Costs of trading with them? What margin will they allow you to trade with?
  16. keep a Trading Journal.
So get yourself organised!  Do it Now!  You may not have all your preferred system details sorted yet, but that's OK.  Just write what's been done so far.  Update it when you work it out.  Once you've written your plan you may find holes in places and you may want to add your own points - by all means, record them.  The most important thing to remember is make it "real" & "honest" and once completed, stick to the plan.  

Technical analysis is not an exact science and although these ideas can increase the probability of making the correct trade, many will go against you and large losses can be incurred. Your own trading strategy needs to be formed and hopefully you'll be on your way to achieving this on completion of this course. <<<<<<< HEAD