What is a Trading Plan?

Having a suitable trading plan is one of the most important aspects of trading. It’s there to act as your own personal decision-making tool, helping you answer vital questions like what, when, why and how much to trade. Your plan should cover your personality, attitude to risk, trading goals, risk management rules and any trading strategies you intend to follow.

Having a trading plan and diary can be the difference between becoming a profitable trader or not, it certainly was for me. When i started to record every trade i did i was able to go back and look at what strategies had more consistency than others narrow down, the more profitable ones and focus on trading them before implementing new ones. Remember you only need one successful strategy to become a profitable trader and then the patience to go with it, to just stick with that one strategy until you have backtested enough data to implement a new one. Over trading not sticking to your own rules is one of the main reasons why so many traders fail to make money.

I would always say to have backtested data of your strategies for 6-12 months of being consistently profitable before you start scaling up your trading size or even trading on a live account at all.

What’s the Difference Between a Trading Strategy, a Trading Plan and a Trading Diary?

You’ll hear these terms used a lot in the industry, often interchangeably, but for the purposes of this course we’ll be talking about specific things when we refer to them:

• A trading strategy defines precisely how you should enter and exit trades. For example, buying EUR/USD with your stop loss 20 points away and your take profit 60 points away giving you a 1:3 risk/reward ratio. Depending on your strategy for entry and exit levels.
• A trading plan is a comprehensive blueprint covering everything from your goals, motivation and attitude to risk, through to risk management rules and analysis of past trades. It can (and should) include both your strategies and your commitment to keeping a diary.
• A trading diary is a written record of everything that happens when you trade, including entry and exit points, profit/loss, trading statistics and even your emotional state before, during and after each trade.

Why is a Trading Plan Important?

It Makes Trading Easier

A trading plan gives you guidance on when and how you should trade. Without a plan you might be constantly worrying about which market to trade, whether to take your profits early, let your losses run, or if you’re missing out on other opportunities in different markets. With a trading plan you’ve done all the thinking upfront, so you can wait for the right market conditions and trade according the parameters you’ve set for yourself.

It Helps you Trade Without Emotion

A plan can remove emotional decision-making in the heat of the moment. You should already know your desired profit, and acceptable loss, on every trade before you place it. This means you’ll be able to cope with any dramatic changes in the market price as your trade is in progress. Realistically, markets can only go up or down, so you should be able to plan for every eventuality beforehand. I always recommend having a stop loss in place before you take a trade so you always know your maximum loss and build your strategy around that. Also when you take that loss having the mindset that if you stuck to your rules it is still a good trade because you know over a period of time you will still make more money than you lose if your strategy is correct.

I always say if you miss your desired entry don’t trade even if you miss a really good trade don’t worry about it, there are always more opportunities and better opportunities that will arise with better risk reward. Its important to have the mindset and mentality to stay patient, stick to your trading plan and not let your emotions take over.

It Helps you to Maintain Discipline

Discipline is an extremely important trait for a trader. Anyone can get lucky on a few trades, but a disciplined trader is much more likely to be profitable in the long run. And if you have a solid trading plan, discipline is much easier to maintain.

Say you start using a simple trading strategy – for example, you go long on the S&P 500 every time it goes up more than 0.5% in one day, with the expectation it will continue to rise.

However, after a couple of trades your strategy doesn’t seem to be working very well and you’ve lost some money. Do you abandon it immediately?

Depending on your circumstances, you might decide to stick with it. You can then find out if there’s a fundamental flaw with the strategy, or if you were just unlucky with the first few trades.

If it’s the former, is there a way you can tweak the strategy based on the results of your trades? By maintaining discipline and sticking to your plan, you could potentially turn a losing strategy into a winning one – or at least discover how and why it wasn’t successful.

It Enables you to Improve

By following a trading plan, and maintaining a trading diary, you can keep a record of what works for you and what doesn’t. This is useful for analysing your own performance and improving as a trader. A full record of every trade makes it much easier to learn from your mistakes, and to evaluate which trades you won (or lost) by luck or by judgment. When i have a drawdown period (period of losing money) i don’t ever see it as a negative, as i am recording every trade, i can learn from my mistakes. Was my entry wrong? Did i stick to my trading plan? Did all the confirmations of my strategy match up? How can i adapt my strategy to improve?

I ask myself all these questions all the time and I can’t emphasise enough how important it is turning a negative into a positive by learning from your mistakes and the rewards you will get in the following months from doing so. It can really make the difference in becoming a profitable consistent trader.