Would you like to elevate your trading to new heights?
Would you like to avoid making emotional trading decisions?
Would you like to preserve your capital so you can make the most out of it?
If so, then grab a pencil and some paper…
Because today I’m sharing a simple yet profound way you can take a huge step forward in your trading…
By developing a trading plan!
Now a trading plan is a written set of rules that defines how and when you will place trades.
But it’s much more than that.
It is also a business plan, a rule book and a financial planner all rolled into one.
Having a documented trading plan that you adhere to religiously for each and every trade is one of the cornerstones of success.
And in my opinion, a trading plan is one of the biggest single factors that separates successful traders from not-so-successful ones.
A trading plan is:
- Personal — tailor made to fit the individual trader.
- A “living document” that will change and evolve over time (AFTER the market has closed for the day, but it’s rock-solid and unchanging while trading)
- A map
- Not a guarantee of success, although it greatly increases the chance of success.
What does a trading plan include?
- Trading goals/objectives
- Will you trade for a living or to supplement your income?
- What instruments will you trade?
- What time frames will you trade?
- How much will your initial investment be?
- Daily routine
- Time allotted for research
- Time allotted for continuing education
- Sufficient rest for an alert mind
- An environment free of distractions
- Times of day to trade and to sit out of the market
- Multiple strategies for multiple markets and market conditions
- Entry rules: Under what circumstances will you enter a trade?
- Risk rules: How much will you commit to the trade?
- Exit rules: Under what circumstances will you close the trade?
- Who are you? In order to personalize your plan you must know who you are, what you have, and what you need.
Ask yourself the following:
- How much time can I commit to trading?
- What skills do I currently have?
- What skills/knowledge do I lack?
- How much risk can I tolerate?
- How will trading affect my relationships?
- Do I have the necessary tools?
- What are my personality traits?
Now that you know the elements that go into your trading plan, I want to share with you 3 keys to a winning trading plan.
Key#1: Having your trading plan in writing.
When your trading plan is written out it acts as a blueprint or a roadmap you can follow to your trading goals.
If it’s not in writing, it’s subject to fear, greed, and emotional decisions.
Why have a written plan?
Consider a mountain climber. Would he begin his assent without:
- Physical training?
- A map?
- Researching the weather, the terrain and the wildlife?
- Having an idea where to stop and rest?
- Enough funds to see him through the journey?
- A camera or journal?
It’s obvious that a mountain climber who fails to carefully plan his expedition will likely encounter disaster.
The same applies to traders dealing in volatile markets. A carefully prepared plan will keep the trader on course and help him avoid the hidden precipices.
Key #2: Back and forward test your plan.
There are two ways you can test your plan.
- Backtesting: Using your plan on historical data to see how it would have performed historically. Many platforms support automated backtesting.
- Forward testing: Also known as paper trading, this allows you to test your plan on the live edge of the market. A simulated trading account is ideal for this.
Key# 3: Trade your plan!
Even the best trade plan will fail if you do not adhere to it in a live market.
But remember that live trading has issues with fills and slippage.
Trades that were good in testing might not have actually filled in a live market due to low volume or limited transactions at that price.
Always account for slippage in your trades. It makes your results much more realistic.
A final piece of advice… don’t forget to keep detailed records!
If you win a trade, you need to know exactly why and how.
More importantly, you need to know the same when you lose, so you don’t repeat unnecessary mistakes.
Write down details such as targets, the entry and exit of each trade, the time, support and resistance levels, daily opening range, market open and close for the day, and record comments about why you made the trade as well as the lessons learned.
Documenting the process helps you learn what works and what doesn’t.
I hope this provides as much value for you as it has for me. Having a written out trade plan is what has enabled me to achieve the success I have.
Hawkeye users are in a fortunate position of having indicators that come with suggested rules for usage that can also be incorporated into personal trading strategies.
Want to simplify the process of creating an effective trading plan?