The over-riding objective of a trading plan is to help you to become and remain one of the small minority of traders that are successful over the longer term.
But most private traders do not have a written trading plan and a way to ensure they follow their plan.
And most traders lose money: it is estimated that up to 90% of new traders lose money in the first year with the majority giving up soon afterwards. These are proven, if unpleasant, facts.
You Need a Trading Plan
Traders lose for a number of reasons but a major reason is that they have an inadequate method for identifying trades that does not put the odds of success in their favour.
Even if they have a good methodology, many trade when the required criteria are not adequately met or try to trade all market types using a single method.
Having a trading plan is essential if you want to trade consistently.
If you don’t have a plan, what do you have?
Just yourself. And you are an inconsistent, subjective and reactive human being.
You will also have a random trade selection process and random trading results in losses.
You won’t know what’s working nor why, and you won’t see what is not working nor why.
And when things go wrong, without a plan you are on your own.
Developing a Plan
I have previously written about the importance of having rules and a process that makes you follow the rules when making trading decisions. You can download a short report on how I do this by following this link.
But many traders to whom I have spoken and who realize that they need a plan do not know how to go about developing such a plan.
So, while I know that each trader needs to develop a plan that suits them – there is no such thing as the perfect plan for everyone – I have tried in this post to set out what I consider to be the main elements of a trading plan.
You should read it together with the post entitled ‘How to Write a Trading Plan’ which provides an outline of a plan that you can use to get you started.
And just to make it as easy as possible, I have put this material and additional relevant advice together into a short eBook entitled ‘Writing Your Trading Plan’.
The title says it all. You can get it simply by clicking here or on the image below.
There’s no registration and no need to enter your email. All I ask is that you tell a friend about this site.
Does that sound like a good deal? Click here to get the report.
What Should be in a Trading Plan?
Having a well designed trading plan and a proven trading system are absolute necessities to tilt the probabilities of success in your favour if you intend to trade the financial markets.
Your plan must be more than a summary of how you might go about finding trades, although this is a major part of the plan.
The plan must be a credible guide that will get you from a starting point to your objective. So it must set out the objective.
Traders regularly go after profit first while success requires that you manage risk first.
Even if this is realised it is often the case that unrealistic expectations will hamper decisions. So appropriate targets must be contained in the plan, along with the details of how to get there.
To be credible it must fit in with your own beliefs about markets, with your objectives and it must be internally consistent.
If you are unsure about any part of it then you must revise it until you are convinced by the plan.
Above all, the plan must be written down.
A Rules Based Discretionary Approach
The approach I use can be described as a rules-based discretionary system.
The inclusion of rules and discretion in a single sentence seems a bit contradictory at first, but is actually sensible when we consider that every moment in the market is different and every trader is different.
We need rules and an in-built discipline to follow the rules. Otherwise we are trading randomly.
And we need to have them written down or else we will bend them to our whims at any moment.
However, no set of workable rules can cover every market situation and so we must leave sufficient flexibility to allow us to use our discretion.
At the very least, the trading plan must contain sufficient elements to achieve 4 objectives:
- It must enable you to filter the market to find opportunities in line with your overall trading strategy.
- It must provide you with a methodology to identify high probability set-ups and entry points within the preferred markets.
- The plan must discipline you to control risk while not overly reducing the probability of a profitable trade.
- It must help you to identify exit points that will maximize profits while minimizing losses.
These are the basic elements of a plan.
However, a good system must go further because it must be implemented consistently.
This requires that you have confidence in your plan. To achieve this, your system must have a number of important characteristics.
Character of the Plan
Inevitably, attempting to list the required character of a plan is somewhat subjective and will reflect the values of the person making the list.
And so, every trader must eventually identify the characteristics they value most.
However, the following list would probably stand up to scrutiny fairly well as the characteristics of a good trading system:
- The steps and decision-making rules must be logical and must follow a logical sequence. If your plan is not logically coherent then what is it?
- It must give you an edge by shifting the probabilities in your favour and must employ proven methodologies to do so. This edge must appear throughout the plan and then translate into successful trades.
- The plan should aim to reduce, in as far as is reasonable, the element of discretion, but should not attempt to eliminate it. Where discretion remains, there should be a planned process to guide decision making, in other words, where written rules do not provide a decision then there should a defined process to follow to get to the decision.
- The plan must be cohesive, consistent and robust in different market types and for different securities. In other words, it must hang together in different situations. Otherwise, you will need a number of plans or you will be constantly tinkering with the plan.
- The plan must allow for learning so it must be adaptive. However, it must not be reactive. Your plan should never be adjusted simply because you experience a few bad outcomes.
- You must feel comfortable with the plan. It must fit with your objectives and your personality. So, know yourself before you start.
- Finally, the plan must impose discipline and provide certainty. Otherwise, you are on your own.
Overall, your system must make profits consistently.
We do not set this as an objective ahead of the requirements above because if the plan fulfills these requirements then profits will follow.
The Next Step
This defines the objectives of your trading plan and gives an outline of what you plan will contain.
However, it is still far from a template for a plan. I have put this in a separate post.
But before you proceed, read back over what is above and see if you can wrote down brief headings for what you think might be contained in a plan in order to fulfill these requirements.
Download the free guide to Writing Your Trading Plan