10 Steps to Building a Winning Trading Plan

What is a trader s trading plan

A trading plan is a must for every serious trader – here is how to do it

A trading plan outlines how a trader will find and execute trades, including under what conditions they will buy and sell securities, how large of a position they will take, how they will manage positions while in them, what securities can be traded, and other rules for when to trade and when not to. Most trading experts recommend that no capital is risked until a trading plan is made. A trading plan is a researched and written document that guides a trader's decisions.

Key Takeaways A trading plan is a roadmap for how to trade, and no trades should be placed without a well-researched plan. The plan is written down and followed. It is not altered unless it is found not to work make money or the trader finds a way to improve it.

10 Steps to Building a Winning Trading Plan

A basic trading plan includes entry and exit rules, as well as risk management and position sizing rules. The trader may add additional rules at their discretion to control when and how they trade. Understanding the Trading Plan Trading plans can be built in a variety of different ways.

Investors will typically customize their own trading plan based on their personal goals and objectives. Trading plans be quite lengthy and detailed, especially for active day traders, such as day traders or swing traders.

They can also be very simple, such as for an investor that just wants to make automatic investments each month into the same mutual funds or exchange traded funds ETFs until retirement. Automatic Investing and Simple Trading Plans Brokerage platforms allow investors to customize automated investing at regular intervals. Many investors use automated investing to invest a specific amount of money each month into mutual funds or other assets. While the process is automated, it should still be based on a plan that is written down.

This way the investor is more prepared for what is a trader s trading plan will happen each month, and the planning process will likely also force them to consider what to do if the market doesn't go their way. After three years, they check their balance and they have actually lost money.

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The trading plan outlines not only what to do to get into positions, but also states when to get out. Buy-and-hold investors may simply automatically invest and they don't sell anything until retirement.

They may even have a rule of not looking at their holdings. Then they start to make larger monthly contributions.

A trading plan is a must for every serious trader - here is how to do it -

Or, other investors may choose to automatically invest every month, but have sell rules for if their investments start to decline too much in value. Automatic investors should also decide how much capital they are going to allocate to each investment. This isn't a random decision. It should be well-thought-out and researched, then written down in the plan and followed.

Trading strategy

While automatic investing is simple, a trading plan is still required to navigate the ups and downs of the investments. Tactical or Active Trading Plans Short-term and long-term investors what is a trader s trading plan choose to utilize a tactic trading plan. Unlike automatic investing where the investor buys securities at regular intervals, the tactical trader is typically looking to enter and exit positions at exact price levels, or only when very specific requirements are met.

Because of this, tactical trading plans are much more detailed.

Ask yourself why you want to become a trader and then write down what you want to achieve from trading. Decide how much time you can commit to trading Work out how much time you can commit to your trading activities. It's also important to spend enough time preparing yourself for trading, which includes education, practising your strategies and analysing the markets.

The tactical trader needs to come up with rules for exactly when they will enter a trade. This could be based on a chart pattern, the price reaching a certain level, a technical indicator signal, a statistical bias, or other factors.

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The tactical trading plan must also state how what is a trader s trading plan exit positions. This includes exiting with a profit, or how and when to get out with a loss. Tactical traders will often utilize limit order s to take profits and stop orders to exit their losses. The trading plan also outlines how much capital is risked on each trade, and how position size is determined.

Additional rules may also be added which specify when it is acceptable to trade and when it isn't. A day trader, for example, may have a rule where they don't trade if volatility is below a certain level, as there may not be enough movement or opportunity. If volatility is below a certain level, they don't trade, even if their entry criteria is triggered. Altering a Trading Plan Trading plans are meant to be well-thought-out and researched documents, written by what is a trader s trading plan trader or investor, as a roadmap for what they need to do in order to profit from the markets.

Plans shouldn't change every time there is a loss or a rough patch. The research that goes into making the plan should help prepare the trader for the ups and downs of investing and trading.

Trading plans should only be altered if a better way of trading or investing is uncovered.

How to create a successful trading plan

If it turns out a trading plan doesn't work, it should be scrapped. No trades are placed until a new plan is made.

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Example of a Trading Plan—Position Sizing and Risk Management A trading plan can be quite detailed, and at minimum should outline what, when, and how to buy; when what is a trader s trading plan how to exit positions, both profitable and unprofitable; and it what is a trader s trading plan also cover how risk will be managed. The trader may also include other rules, such as how securities to trade will be found, and when it is or isn't acceptable to trade.

To give an example of what one of these sections could look like, let's assume a trader has determined their entry and exit rules. That is, they have determined where they will enter, and where they will take profits and cut losses. Now, they need to come up with risk management rules. This rule governs position size, because position size is the only unknown and needs to be calculated.

Leverage or No Leverage The trading plan should outline whether leverage can be used or not, and how much if it is allowed. Leverage increases both returns and losses. Correlated or Uncorrelated Assets Part of the risk management process is determining whether correlated assets are allowed to be traded, and to what degree.

For example, an investor must decide if they are allowed to take full positions in two stocks that move very similar. Doing so could result in double-risk if both hit the stop loss, but also double-profits if the targets are reached. Trading Restrictions A trading plan may include curbs that stop trading when things aren't going well.

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For example, a day trader may have a rule to stop trading if they lose three trades in a row, or lose a set amount of money. They stop trading for the day and can resume the next day.

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Other trading restrictions may include reducing position size by a set degree when things are not going well, and increasing position size by a set amount when things are going well. The risk management section of the trading plan may include all these rules, customized by the trader. It may also include other rules that help the trader manage their risk according to their objectives and risk tolerance. Compare Accounts.