Making a trading plan for your trading is one of the most important aspects a trader can do when following a strategy, unfortunately that does not mean that everyone has one and in fact a lot studies and polls on this topic have shown that most new traders do not have a plan at all. In this topic I will break down firstly what a trading plan is and how you can begin to design your own trading plan for the strategy that you trade in the market.
What is a Trading Plan?
A trading plan is a guide to how you trade a specific strategy in the market at a time that is most suitable to you as a trader, whether it be price action based like the high probability methods I teach at the website or whether it be another method. So in other words, it is the rules you set for yourself for trading a specific strategy in the market.
Aspects it often includes:
- When to trade the strategy? A time that suits you and is available to you as a trader. In preference if trading below the daily chart, the London to New York session are better trading time frames.
- What markets you want to trade? This could be a set amount of markets or could be dynamic based on what markets are trending well at that time.
- What defined risk maximum you are willing to risk per POSITION? This is a big one as risk tolerance is different to every trader: I recommend below 2% risk of account size maximum.
- What time frame is going to be your dominant trading time frame? Time frame where you look for evidence or whatever reasoning you use for entering a trade.
- Defining how you deal with a winning trade.
- Defining how you deal with a losing trade.
- Defining how you manage your trades around a major news event.
- Defining Maximum Exposure
- How long you hold a position?
- Defining Screen Time
How to Make a Trading Plan?
Making a trading plan is best started in my opinion by jotting down all the points I highlighted above and answering these questions. Then once you have finished writing down your answers, then take those answers and place on a clean sheet of paper to place next to your trading desk. If you can think of any other conditions that should be added to your trading plan then add it is also.
Let’s look at a hypothetical example based on the common trading plan aspects I highlighted above:
- Trading Time: First 8 hours of the London to New York Session I will check the charts at each candle close on trading time frame – Tuesday to Friday.
- Trading Time Frame: 4 Hour
- Markets: EURUSD, GBPUSD, AUDUSD, EURCAD, GBPNZD and CADCHF
- Risk: 1% per signal of account size.
- Exposure: 3 positions
- More than 2 winners in a row: Option to have a 24 hour break.
- More than 2 losses in a row: Have a 24 hour break from opening new trading positions.
- Major Fundamental Rules: Do not open new positions before event, instead manage held positions: if a held position is near the full target close half of position ( partial profit closing ) and if a position held is near entry price close that held position.
- How Long: I will hold a position as long as needed to reach management points or full targets or stop loss, as well as hold over the weekend.
- Screen Time: Checking each candle close on the 4 hour. If a setup presents itself then I will set: entry levels, management levels, partial profit levels, full target levels and stop loss. After setting I will leave computer and not watch the trade. If checking position after, I will only check on each candle close.
Now of course, every traders personal trading plan will be different as it is a plan designed to suit you as a trader. Your plan may include more rules or may include less rules than the hypothetical example I give above. You may prefer as an example the 1 hour as the evidence time frame or you may prefer the daily and so each of these would be adjusted accordingly, however this helps give you an idea of where to start. Also as a trader you may decide to treat major fundamentals differently to the trading plan example above or you may ignore them completely as a part of your trading plan as you trade higher time frames where fundamentals have less effect on the strategy you use.
Another important point is to try to see a trading plan as adaptive rules as well, meaning that if a trading plan rule is not suiting the methodology or you as a trader, then you can then adjust the plan accordingly to improve the way you trade the strategy.