Your Trading Plan is ESSENTIAL to your success as a trader. Failure to implement a trading plan is the number one reason I see traders fail.
Day trading is like any other business. Anyone thinking of starting a business wouldn’t begin without a plan, and if they do they most likely won’t like the end results.
After reading this post you will know how to write a rock solid trading plan. I will also share with you some examples of what my trading plan has evolved into through 15 years of trading. So let’s get started!
What Is a Trading Plan?
A trading plan is a systematic methodology outlining how a trader will find, execute, and manage trades. Ultimately it’s the Holy Grail of trading.
Think of it as your playbook. No matter what the market throws at you, you will always have a predetermined response as a result of your plan.
Trading plans should be used by all types of traders including intraday, swing, and long term traders. Whether you trade stocks, futures, forex, options, or crypto…YOU NEED A TRADING PLAN.
Why You Need a Trading Plan
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 you’re 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.
It should be read every day before any trades are placed.
How To Implement Your Trading Plan
First things first you need to backtest your strategy. When developing or testing a new strategy you should backtest 50-100 trades over different volatility. Pick several days with tight ranges as well as several with strong trends.
After you have confirmed you have something worth putting more effort into you need to sim trade the strategy. Trading is 80% psychological thus your strategies performance will most likely be different than when you backtested.
After you have sim traded your plan for a month and shown consistent profitability it’s time to write your trading plan.
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. I can’t stress how important this is!
My Personal Examples:
- Neatly make bed…You may laugh at this but there’s a reason the armed services drill this into trainees heads.
- Brush teeth
- 15 minute stretch and workout
- Prepare a snack for day
- At computer minimum of 30 minutes before open
- Review yesterday’s trade journal
- View economic numbers for the day
- Read trade plan
- Notate key support and resistance levels
I perform the same routine like clockwork every single day. Trading requires great discipline and consistency, having a detailed morning routine will help you with this.
Step 2 – The Vow
You need to write a simple yet serious vow to follow your trade plan and never break it. Do this in your own words.
My Vow: I vow to follow every rule in my trade plan for the sake of my family and my future. Everything I have worked so hard for will be taken away by the markets the second I don’t.
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
- Truly become financially free
Step 4 – Market Theory
Define some constants or truths that you believe exist in the markets. Start by reading this post on auction market theory.
- 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
- I’m not smarter than the market but my strategy gives me an edge
- Strong trends typically go further than anyone would have thought
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 or golden trade setup. Put as much detail into this section as you can including any macro components you may look at.
Example – The Setup:
- Price breaks X
- A indicator is above X
- B indicator is above X
- Enter on following 1 minute bar
Avoid Trades When:
- Economic numbers are coming out
Whatever events lower your probability of winning. An example is maybe your system works best in a range bound market so you avoid strong trending days.
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, you want to have a plan while you still have objectivity. Once you enter a position you will lose some of your 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 what order flow in a given market is telling me.
Stop loss of X ticks/pips/points. Close half of position at first resistance level. Trail stop on remainder of position.
Step 8 – Risk Management
Money management is a key component to a successful trade plan and typically one of the rules that is broken 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.
Risk management doesn’t have to be overly complex. Decide what you will risk per trade and your max drawdown for a day and your 90% of the way there.
- Never risk more than 1% on a trade
- Three 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 take the remainder of 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 screenshots of every trade so you can go back and review them.
Reviewing your past trades is extremely beneficial when you’re in a drawdown. It gives you the confidence to stick to your system and grind your way out.
Finally I feel the most important aftermarket routine I do every single day is work out. Trading is an emotionally draining business. There’s not many professions where you go to work and perform your work perfectly yet leave the office with less money than when you got there.
Keeping mentally fit is key in this business. My workout routine resets my mental state whether I had a green or red trading day.
Step 10 – Weekend Routine
Typically I perform my weekend routine on Sunday evening.
- Review trade journal notes
- Review trades I took 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 15 years, I still learn new things and am constantly trying to improve.
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.
Trading Plan Template Download
If you would like my trading plan template become a JT Insider, IT’S FREE! On top of that you get a bunch of other cool stuff.
Any time a trader has come to me over the years when they were struggling it was because of them breaking a rule in their trading plan.
Trading is as difficult as you want to make it. Writing a solid trading plan and having the discipline to follow it will increase your odds of success exponentially over your peers.
Make your trading plan as precise as possible without making it too wordy. I try to keep my trading plan to one page as I read it every morning.
Finally, you should share your trading plan with an accountability partner. It’s best if it’s someone who is financially tied to you such as a significant other. They don’t need to understand trading but they need to understand your rules and you must be completely transparent with them or you’re only cheating yourself.
Have a quick meeting with them everyday when you first start trading and discuss what you did well and what you need to work on.
I hope this post really sinks in as I can’t stress how vital a solid trading plan is!
What do you like to include in your trading plan?