Develop your Trading Plan

Sometimes there is a misconception that you need highly evolved market knowledge and
years of trading experience to be successful. However, we often see that the more
information we have the more difficult it is to create a clear plan. More information tends to
create hesitation and doubt, which in turn allows emotions to creep in. This can prevent you
from taking a step back and looking at a situation subjectively.

If you don’t know where you are going, any road will get you there. In trading, if you don’t
set out a plan for your trades and develop strategies to follow you have no way to measure
your success. The vast majority of people do not trade to a plan, so it’s not a mystery why
they lose money. Trading with a plan is comparable to building a business. We are never
going to be able to beat the market. In general it’s not about winning or losing, it’s about
being profitable overall.

Why a trading plan is important

When trading, as in most endeavors, it’s important to start at the end and work backwards
to create your plan and figure out what type of trader you should be. The most successful
traders trade to a plan, and may even have several plans that work together. Always write
things down. Why? Because it will help you stay focused on your trading objectives, and the
less judgment we have to use the better. A plan helps you maintain discipline as a trader. It
should help you trade consistently, manage your emotions, and even help to improve your
trading strategy. It is also important to use your plan. Many people make the mistake of
spending all their time creating a plan, then never implementing it.

Key components to develop a trading plan

Trading plan structure and monetary goals

Research and education

Strategy using fundamental and technical tools

Money and risk management

Timing

Trade mechanics, documentation, and testing

How to build a trading plan

Make sure you do your own research and build a plan according to your needs. Find
confidence in what you know. The tools you have selected for your strategy are key, from
the type of chart to the specific drawing tools to even the most elaborate of strategies. Test
your plan in the beginning to make sure you are on the right track. After you have begun
trading, continue testing it regularly. This allows you to measure your success by clearly
seeing what works and what does not work. From there you can tweak elements that might
be weaker and not contributing to your overall goal. Ask yourself the following questions
(The answers to these will assist you in the foundation for your trading plan and should be
referred back to regularly to insure that you are on track with your plan.)

Why am I trading?

If your immediate answer is, “to make money” you should stop right there. If the only goal is
to make as much money as fast as we can, we are ultimately doomed, because it will never
be enough. Managing your losses should be your primary goal. This will create an
environment in which profits can be generated.

What is your motivation?

Solid retirement? New career? Spend more time with family and friends?

Ask yourself, “What are my strengths and weaknesses?”

How do I maximize my strengths to minimize my weaknesses?

An example of a weakness is a need to constantly watch one’s trades. Is your laptop on the
pillow, waking you up in the middle of the night to monitor trades? It’s really difficult to
make intelligent decisions when you’re half awake.

Is the amount of money I have to trade with sensible to achieve my goals?

Look at things in percentages; remember leverage is a double-edged sword. That is why risk
and money management are key.

Deciding what type of trader you are can be tough; especially since the trader you want to
be can be very different from the type of trader you should be based on your behaviors and
characteristics. Once you have laid out your goals, risk appetite, strengths, and weaknesses
it should become apparent which type of trading fits you best. You will notice three columns
in the chart; they are labeled short, base and long. Base equals the timeframe charts you
spend the majority of your time, if you are not sure, this is the timeframe chart that you
keep going back to. Short and long are the timeframe charts that you refer to confirming or
denying what is happening in the base timeframe chart. A common mistake traders make is
jumping around randomly between chart timeframes.

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