This post provides an outline of an approach you can use to write a trading plan and a guide to how you might go about writing your own plan in order to achieve the objectives you have set.
It is based on a trend following approach, primarily using technical analysis, but this does not determine the outline.
If you wish to use a different overall strategy then you would only need to alter the language in a few places for this outline to be equally applicable.
This is because this post does not go into detail in relation to the specific trade setups you might use.
A setup is a set of rules that identify a trading opportunity and may also assist in timing an entry.
For example, a simple setup might be to enter a trade when a fast moving average crosses slower moving average and the RSI moves out of an overbought or oversold area.
I’m not advocating this as a trading rule, it’s just an example, and there are a multitude such setups that you can use.
What matters is that the setup makes sense and that you follow it.
This requires that the rules are not contradictory, that they improve the chances of a winning trade, and that you have the discipline to follow the rules.
These rules also need to be written down . So your actual trading plan will be longer than what is contained here.
In a previous post I outlined what I consider to be the main objectives of a trading plan and what it must contain in order to achieve these objectives.
If you have not done so you may wish to read that post before proceeding.
And to make it as easy for you as possible I have also put these posts together with other material into a free guide to Writing Your Trading Plan that you can download by clicking here or on the image below.
The Guide is free and your don’t need to register or supply an email address. All I ask is that you tell a friend about this site and what we do here.
So Click Here to Download the Guide.
Start to Write a Trading Plan
It could be a dangerous thing to provide an outline for a trading plan as each trader will need to develop their own rather than filling in the blanks in someone else’s plan.
However, while stressing that this is just one version of what a trading plan might look like, here goes.
Start with a series of questions:
- What are your objectives and expectations from trading?
- What is your understanding of the way markets move and how a trader should approach the markets?
- What is the overall strategy that guides your plan?
- What precise rules will you use to identify entries (these are the set ups)?
- How will you control risk?
- How will you monitor adherence to your plan?
- How will you monitor performance and act if change is required?
Remember, when writing a plan, or anything else for that matter, every chapter, every section, every paragraph and even every sentence is an answer to a question.
Specify these questions, in your mind at least, before you write anything.
You will find that this actually makes it easier to write and also helps to keep your plan concise and consistent.
A trading plan might include the following headings, guided by the questions above, (with suggested text and questions to be answered in italics):
1. Your Objectives
You need to state your objectives as a trader. It’s not enough to just say ‘make money’ without quantifying what this means.
Consider the following:
My objective is to supplement my income through trading with a target of making x% return on my trading fund per annum. This would amount to $_ _ _ _ (or £ or €). This would be x% of my income from my full time job and so I will devote x hours per week to trading.
In the longer term I will aspire towards making my full-time living from trading but not until my annual income from trading is at least equal to 80% (or _ _%) of my current income from my job.
Notice the use of the 1st person in these statements. This should be the case as much as possible in your plan.
2. Your Understanding of Trading and the Markets
This is not an easy section to write but it involves self-examination and an assessment of where you currently are in your learning process.
Keep it concise and update it often.
The following is just a suggestion and is based in part on Mark Douglas’s excellent book Trading in the Zone. If you have not read that book it is highly recommended.
Would you be able to write the following list and believe it?
I understand that in trading:
- The market is neutral in the information it presents.
- The information must be processed objectively.
- Anything can happen so I don’t know what will happen next so I don’t engage in making predictions.
- I don’t need to know what is going to happen next in order to make money.
- Patterns repeat themselves but not every time.
- Entries will be based on trading set-ups that provide an edge.
- An edge is an indication of a higher probability of one thing happening than another.
- There is a random distribution between wins and losses for any given set of variables that define a setup.
- Every moment in the market is unique.
- Every trade is independent so I never try to make back losses.
Go through this list again. Would you be able to write it into your plan?
It’s my list and you are free to have a different opinion on as many of these topics as you wish. Just know why you disagree with me.
It is vitally important that you don’t’ write anything you don’t understand and don’t accept. So adjust the above as necessary until you are happy with it.
Consistency is the Key
At all times, your aim must be to achieve consistent behavior if you wish to achieve consistent profits. Can you write the following an believe it?
Consistency requires that:
- I objectively identify my edges i.e. what will tip the odds in my favour.
- I define and implement setups that reflect these identified edges. These setups will be assessed and modified periodically.
- I enter trades only in compliance with defined setups.
- I pre-define the risk on every trade. At no time will I risk more than 2% of my trading capital on a single trade.
- I completely accept the risk or I pass on the trade.
- I act on my signals without reservation or hesitation. While retaining discretion I do not second guess my system.
- I keep and review comprehensive records.
- I continually monitor my susceptibility for making errors.
- I am rigid in following my trading rules but flexible in terms of my expectations for any trade.
- I understand the absolute necessity of these principles of consistent success and, therefore, I never violate them.
If you don’t understand any of these statements then you have some studying to do.
If nothing else, by forcing you to get to grips with these important concepts this is a good place to start in terms of getting your trading career underway.
You may also wish to include some opinions in relation to what makes different markets move. These might include something along the following lines:
- Forex markets tend to trend and move in response to economic news;
- Stock indices trend better than individual stocks and are less prone to sudden moves;
- Stock prices tend to move in response to announcements by companies;
- Commodity markets also trend well but respond to a wide range of factors and I cannot be a specialist in all these markets;
- Markets tend to revert to the mean and so extended trends are more dangerous to trade than trends close to moving averages;
- Lines and areas of support and resistance tend to contain prices and the more times a particular area holds the more important it is. A break is usually significant;
- Charts tend to show very similar patterns on different timescales but the larger the timescale the more important the pattern.
- Technical indicators are useful in assessing how prices are behaving but none are perfect and they are backward looking.
This list is in no sense comprehensive but should give you an idea of the sort of opinions or beliefs that you may hold or adopt in relation to markets.
If you don’t accept any or all of these statements then that’s fine. They are just my opinions and beliefs.
I have my reasons for holding these opinions, mostly arising from my experiences.
You have different skills and experiences, so you will not necessarily hold the same opinions.
But know why you don’t accept any of these statements.
Create an argument for why and identify what you do accept. Above all, don’t put any statement into your plan if you don’t accept it.
Remember, it’s your plan, not my plan or anyone else’s.
If you don’t accept this then you are denying responsibility for your decisions. That is a fatal error.
3. Your Strategy
What will be your main strategy?
My approach is based on trend following – the idea that a market that is moving in a particular direction is more likely to continue to move in that direction than to reverse.
If you accept this then once you know the trend you know the direction of any trade you will take as will you always trade with the trend. Identifying entries then becomes largely a matter of timing since markets do not move in straight lines.
Remember that this is my strategy, but it’s also the most commonly followed strategy among traders.
However, your plan will need to go a lot further than a simple statement that you will follow the trend.
So, you might include a statement such as:
My strategy is based on a trend following methodology using pre-defined set-ups to identify trades and how they will be managed.
If this is your approach then you will need to set out in detail:
- How you will identify a trend;
- What markets you will concentrate on;
- What inputs you will use or need, such as data, training, news, newsletters, etc.
- What brokers you will use and why;
- What mentors and writers you will follow, if any;
- How you will assess your performance.
And so on. Make sure all the practicalities are covered.
Once you have your strategy decided and have identified your set-ups then this section is fairly straightforward to complete.
However, it should be subject to revision every so often.
4. Detailed Methodology
This is the section where most trading plans begin, but if you have not thought through the foregoing then you risk putting together an inconsistent or contradictory methodology.
Questions to be answered include the following:
- How will you identify trends?
- How will you assess any trend you find?
- What criteria comprise the set-ups you will use to identify opportunities?
- How will you decide what trades to take and when to enter?
Notice that there is not a simple or single answer to most of these questions.
In fact, each set-up you use will be different and will have a unique methodology for identifying when a trade should be taken.
Spell out the methodology in detail in this section. Don’t be afraid of overdoing it on the detail – your plan is not meant to be a flowing read.
Identify which technical indicators you will use, which fundamental data you will watch and how you will react to the information you collect.
Describe each set-up, name them and get to know them closely.
While I have purposely kept this section brief in this post, this will likely be the largest part of your plan and the one to which you will return to revise and update most often.
5. Risk Control
I have mentioned before, but it is worth spelling out in detail in your plan the rules regarding risk.
The methodology for calculation the stake size needs to be set out.
I know what I am going to do – risk no more than 2% of my fund on any trade and 15% to 20% overall. But you should spell out what you are going to do.
If you don’t think this is a good rule then develop your own. But be clear about why you are rejecting this commonly applied risk management rule.
You should also include a rule for what you will do if you experience a string of losses such that your fund is down by a certain percentage in a period.
Will you stop trading for a period as this may indicate that there is something pointing you in the wrong direction?
You don’t know if this is some flaw in the system that you are using or some flaw in your interpretation of the results.
But it may be that the markets are just in a choppy unpredictable phase, or perhaps you are missing something that requires you to step back and review your process.
I would advise that if you are feeling uncomfortable, then stop.
Above all, don’t try to win back losses by becoming more aggressive.
Don’t take on greater risk when things go bad. That makes no sense. You should do exactly the opposite.
The market does not know whether you have won or lost and does not care.
If you have been losing then your chances of winning might be reduced as something might be wrong. So this is the worst time to take on extra risk.
6. Ongoing Assessment
You need to assess your performance honestly and objectively. This must be part of your plan.
Make a commitment in your plan to
- Keep good records of trades – why the trade was taken, how it performed and any errors that were made;
- Monitor performance in terms of numerics such as profits, the win rate, the return on funds, the return on risk, and how the fund changes;
- Assess how any changes to the plan perform and the process of revision;
- Note how well you are keeping to the plan;
- Keep learning.
Before assessing how well a system is performing, the trader must be able to identify which trades were taken in line with the rules and which were not.
As a target, a trader must aim to ensure that more than 90% of the trades taken kept to the rules.
If you are not achieving this then you cannot assume that there is a problem with the plan or the system you are using, even if your trading is not profitable.
It stands to reason then that changing the system is not going to solve the problem.
But this is the cycle that many traders, even those with a good plan, get caught into:
- They have a plan
- The fail to keep to the plan
- They start to lose
- They change the plan expecting to become profitable.
- They repeat the cycle.
Can you see the flaw in this process?
So, once you have a plan in which you believe, you need to develop the discipline to implement it.
This is where mindfulness comes in.
Is That It?
There is obviously a lot here. When finished, the largest part of your plan will probably be the methodology, which I have not developed here to any extent.
However, every part of the plan is important.
Perhaps the first useful task you can undertake would be to see what might be missing from this outline that you would wish to see in your plan.
I have not purposely excluded anything but this is just my outline, without the detailed methodology for finding trades. It is therefore just one possible outline.
Remember that a trading plan is a guide and it will only be of use if you keep to it. So you must believe in everything you write.
However, as with every good plan, it should be constantly updated and revised although it should not be changed simply in reaction to a bad experience with any trade.
And because it can always be changed afterwards, the most important point is that you must set about writing the plan.
No matter how long you wait or what you read or learn, it will always be imperfect. So start writing now, you can always change it later.
Download the guide to Writing Your Trading Plan.