We can all agree that a trading plan is very much a necessity in our trading career. It provides traders with a clear structure to maneuver in the financial markets. Without a trading plan, we are like sailors without a map, not knowing where to go. Our fate, or should I say trading performance, will then be a pure function of luck.

How to Create a Trading Plan?

The following are the key factors to focus on when creating a profitable trading plan.

A. Understanding Ourselves

As traders, we should take a good look at ourselves and understand our personalities as they affect almost everything we do in trading, from the type of trading strategy we use to risk management parameters.

Patience

One important trait is patience.

Are you patient enough while waiting for a setup to form? Are you patient with letting trades run for as long as they can?

For traders with great patience, swing trading may be a good option. On the other hand, intraday trading or even scalping may be more relevant for traders who prefer to see the trade outcomes quicker.

At the end of the day, patience is a virtue in trading. We need the patience to wait for the best setup to form and let the market do its thing while we are in a trade. We also need patience while we are compounding our trading capital.

*Kindly confirm your Trading Style: Swing Trading/ Intraday Trading/ Scalping

B. Time Availability

Determine how much time you can allocate for trading. Maybe it is 30 minutes after work. Perhaps it is 3 hours daily.

For those who have less available time, swing trading might be more suitable since it is not so time-demanding where you only check the charts once a day. Most swing traders check the charts after the New York session ends and the daily candle closes. On the flip side, if you have more time to invest, you have the extra option to do shorter-term trading.

Either way, the market is open 24 hours a day and there will always be a session for you to trade. However, do note that trading volume differs across sessions. Statistically, the London and New York sessions have the highest trading volume and they might be the most optimal sessions for short-term traders as the market is more active and the price is less likely to be stationary.

*Kindly confirm your trading sessions(s)

C. Risk Tolerance

Moving on, find out your level of risk appetite. A risk-seeking person is more willing to incur risks compared to risk-averse individuals.

A common piece of advice is to risk no more than 1% on a single trade but it is not a one-size-for-all. A good way to find out how much you are willing to risk is to put on trades on a live trading account.

Why a live account? That is because it is real money on the line and you need to address all the possible emotions that will arise when you trade live.

Start with a lower amount of risk and slowly increase the stakes. At the moment when you feel your heartbeats go faster, you will know that is too much money at risk. Tone it down a notch and that should be the optimal amount of risk, for YOU.

When you are mapping out your risk management, It is also imperative to know that as the risk per trade increases, the risk of ruin will increase exponentially. As Marc Lasry once said: “Most investors focus on how much they’re going to make rather than how much they could lose. Our focus is on the downside”. Always make sure you can live to trade another day.

Kindly confirm the risk parameters: Risk per trade/ Maximum account drawdown per day/week

D. Type of Analysis

There are different types of analysis that you could employ in your trading. It could be fundamental analysis, where great significance is placed on analyzing economic news data and their potential impact on the markets.

On the other hand, we have technical analysts whose primary focus is the charts and their historical movement. They trust that the charts will tell them what is most likely to happen next based on their charting model.

What if we could take the best of both worlds and incorporate it into our trading plan? Will that significantly increase our bottom-line performance? Or should we just focus on one type of analysis and be the best at it? Do your own research for this one and see what works best!

Read also: what is Sentiment Analysis

E. Number of Setups/ Trades

It is best if we can limit the number of entry signals that we focus on. If we direct our attention to only one or two setups, it will ensure that we do not miss any potential trade during our trading session. It will also avoid analysis paralysis where multiple setups contradict each other.

The number of trades per day should also be capped to avoid over-trading and emotional trading.

F. Journaling

Journalling is a must and we can’t stress this enough. Keeping track of all the trades that you have taken is so valuable as it allows us to review what happened in detail. If it was a losing trade, we want to know the mistakes we made, or was it just pure probability. We paid the loss to the markets, the least we can do is to learn a lesson and if it was a winning trade, we want to know what we did right and how we can replicate it and do it over and over again.

• How do we journal? The format of journaling has to be defined beforehand. 
• Where do we journal? Is it a physical notebook or a cloud-based platform?
• When do we review our journal? Is it on a weekly basis?

Read also: Secrets to effective trade journaling 

Recap

To ensure that you have a rock-solid trading plan to rely on, ensure these key elements are accounted for;

• Swing Trading/ Intraday Trading/ Scalping
• Analysis- Economic News? Charting patterns/ Price action
• Time of day
• Risk per trade/ Maximum exposure at a time
• Number of trades per day
• Where do I journal and keep track of my trades

Are you looking for a Trading plan template? It is not going to be included here. We know you are going to feel more accomplished if you build it yourself from scratch and that trading plan is made by you, for you. It is unique and is best suited to your trading style. 

At the end of the day, a good trading plan is one that you can follow religiously and is tailored to your needs. 

Create your personal trading plan with our key points above and start trading now

Ru Yi
Financial Markets Analyst