One of the first things that traders are asked to do is to develop a trading plan that outlines the trading strategy and a list of rules to be followed in implementing that strategy. The only problem with this advice is that novice traders have no actual trading experience and are lost when trying to formulate a trading plan for their trading.
Another problem with trading plans is that novices are instructed to deal with their plans as a gospel and are asked not to deviate from them. Traders are adapting their strategies and rules to improve their performance, a key step in every trader's curve.
Instead of creating a rigid document early in your business and not changing it, you should instead display your trading plan as a live set of breathing guidelines, and be able to adjust whenever you gain experience in trading. This article will teach you how to create a trading plan that will guide your trading efforts without interrupting your progress.
7-Point Trading Plan Template
When creating your trading plan, here are the elements you should include:
1. Markets – What markets will you focus on? Be as specific as possible – if you are trading in stocks, what types of stocks will you focus on?
(2). Timeline – How long will you keep your positions? Are you going to be a daily trader focusing on deals that you think in a few minutes, or a rolling trader who is dragging trades for a few days?
(3). Time Period – At what time of day will you trade? You may have external responsibilities that prevent you from trading on a solid trading day. Choose the day's times that suit your style.
(4). Trading Pattern – How do you describe your trading style? Perhaps you are a momentum trader with a focus on traded stocks? Or maybe you specialize in a particular sector? Again, this can change as you gain experience and learn from your results.
(5). Risk Management Rules – This is a very basic element and is often overlooked in your trading plan. How can you manage your risk, based on each trade in general? You must have a "stop trading" point, which is a dollar-denominated amount that will force you to stop trading if this amount is reduced.
(6). Guide – Who will you follow and learn as a teacher? Trying to learn to trade on your own is not only lonely; it is crap because it ignores the wisdom gained from other traders. You can repeat the mistakes of other professionals and wish to learn the lessons and techniques they have learned in the end, or simply learn from successful traders and overcome those initial frustrations.
(7). Learning Process – How will your learning process be organized as a trader? What steps do you take to ensure that you're always improving? How will you build your trading journal?
Example of Trading Plan
To show you this trading plan form, I will fill it according to my trading pattern:
1. I trade in US stock markets, with a focus on volatile stocks of sufficient size. These stocks are usually the focus of the news, so they are "in play".
(2). I am a day trader and keep my Mercedes anywhere from a few seconds to a few hours. I am primarily a exploiter and I look forward to taking advantage of the short-term imbalances between supply and demand. I will stay in trade as long as I can determine the imbalance between supply and demand.
(3). I trade during the trading day, although I focus most of my activity on opening and closing from the trading day.
(4). While I have multiple patterns, I describe myself primarily as a momentum trader that relationships on the tape read to identify risk / reward situations favorable to enter the trend.
(5). I am sympathetic about risk management, both on the basis of trade and in general. Every transaction I make contains a predefined stop loss and I have a daily stop loss to stop trading when I have a hard day.
(6). I've had a variety of mentors during my career, and now I'm talking with a select group of traders in my company with similar trading styles.
(7). I review every trade I make, always looking for ways I can improve it. This may be as simple as reducing risk when trading certain stocks or changing patterns of execution.
Your trading plan can be simple, just a series of phrases that answer these seven questions. You should also not spend too much time creating your own trading plan as it will constantly change through your career.
Your trading plan will crystallize exactly what you are trying to achieve, but do not see it as specified in the stone. Instead, your plan will grow and change as you gain experience and develop your own business style.
Your trading plan also needs to be a complex document covering multiple pages. You simply need to identify the markets you will trade, how you will trade them (how long you will keep your positions, what times of day you will trade and how you trade), how you will manage the risks, and how you will continue to develop as a trader. By clearly clarifying these seven key points, your trading plan will serve you and support you in your business.