Your Trading Plan is essential to your success as a trader whether you trade stocks, futures, options or Forex.
Trading has to be treated like any other business. Anyone thinking of starting a business wouldn’t begin without a plan, and if they did they most likely wouldn’t like the end results.
Good trading should be effortless. The preparation is where the hard work comes.
Imagine two runners, on one hand someone completely out of shape trying to run 1 mile in 10 minutes versus a world-class runner. The process looks effortless for the world-class runner and it is. He put all of his hard work into his preparation resulting in a process that is effortless.
Great traders are very confident, partially due to their preparation. If you’re not sure your going to win, then you’re not where you need to be yet. The best traders in the world know they have won before they start the game.
Your trading plan is part of this necessary preparation.
The objectivity and clarity that a solid trading plan provides is essential in a market that requires split second decision making to take advantage of opportunities. It will empower you to trade objectively with confidence and less emotional involvement.
Consider it your playbook for success. It should be read every day before any trades are placed.
Trading Plan Outline
Step 1 – Premarket Routine
Develop a routine every morning that you follow to build discipline and consistency. It will prepare you and put you in the right frame of mind for the day ahead.
- Work out for 10 minutes when I wake up
- Meditate for 10 minutes when I wake up
- Be at computer 30 minutes prior to market open
- Review yesterdays trade journal
- View economic numbers for the day
- Read trade plan before open
- Define key support and resistance levels
Step 2 – The Vow
You need to make a simple yet serious commitment to follow your trade plan and never break it. Do this in your own words.
Step 3 – Goals
Define what you want trading to provide for you and why you are willing to work relentlessly for it.
- Create the lifestyle I want where I can turn work off when I’m done and enjoy everyday
- Provide for my family and the ones I care about
- Enjoy my career and be excited to go to work everyday
Step 4 – Market Theory
Define some constants or truths that you believe exist in the markets.
- The market can and will do anything
- Old resistance becomes new support
- At any second the market can take everything I worked so hard to gain
Step 5 – Trade Theory
Define what thoughts, attitudes, and rules you believe are critical to being a successful trader.
- Consistency is the key to long-term success
- 4 basic outcomes: big winner, little winner, little loser, and big loser. Eliminate big losers for success.
- There will always be another trade.
- Taking trades outside of my trade plan will destroy me. Sometimes they work which is one of the worst things.
Step 6 –Define Your Trading Strategy Step by Step
This should be an example of the perfect/golden trade.
- Price breaks X
- A indicator is above X
- B indicator is above X
- Enter on following 1 minute bar
Step 7 – Trade Management
Learning how to manage a trade can be just as difficult as when to get in a trade.
Having a precise set of rules you follow once in a trade is essential. Again we want to have a plan while we still have objectivity. Define precisely when you will take profit and where your stop will be.
I personally have several take profit strategies I use. It varies based on market action. (chop vs. strong trend)
Stop loss of 20 ticks/pips/points. Close half of position when price breaks X moving average. Close remaining half when price breaks Y moving average.
Step 8 – Money Management
Money management is a key component to a successful trade plan and typically the rule that is broken the most by new traders.
Losing trades are inevitable. Your money management needs to define not only what you will risk per trade but also what you will do in the event of a large drawdown.
- Never risk more than 1% on a trade
- Two losses in a row I’m done trading for the day
- Two consecutive trading days negative in a row cut trading size in half
- Three negative days in a row I will take the week off
Step 9 – Aftermarket Routine
Every trader makes mistakes. The question is whether or not you will learn from those mistakes or just keep paying over and over again to experience them.
Keeping a trade journal throughout the day of all your trades as well as what you did right and wrong on every trade is essential to growing as a trader. Make sure to take screen shots of everyday so you can go back and review your trades.
Step 10 – Weekend Routine
Typically I perform my weekend routine on Sunday evening.
- Review trade journal notes
- Review trades from the week
- Backup computer and any changes made to my charting software
The markets are always changing and presenting new opportunities as well as challenges. Even after 14 years, I learn something new almost everyday.
Remaining focused on why you started trading in the first place is important. Don’t ever lose sight of your goals. Your new trading plan is your tool to constantly evaluate your behavior allowing you to grow into a successful trader.
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