Intermediate

Techniques of successful traders

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How to develop a trading plan

4.5-minute read

A comprehensive plan is crucial to successful trading – without one, you won’t have a strategy to guide you or the means to measure your success.

Why a trading plan is important

In short, the most successful traders have a plan. You can’t guarantee that you’ll always be able to beat the market, but a plan can help set the groundwork for successful trading.

With one in place and written down, you’ll find it much easier to remain focused on your trading objectives. When the markets are at their most stressful, you don’t want to have to rely on your judgement. A plan tells you precisely what to do, so you can maintain discipline and consistency while keeping losses in check.

TIP - A plan is useless unless it is put into action. Many make the mistake of investing a lot of time into creating a strategy, but then discarding it when they start trading the markets.

How to build a trading plan

1. Evaluate yourself

To build a trading plan, you first of all need to take a step back and evaluate your market expertise, goals and weaknesses. After all, you want your plan to be as tailored to you as possible.

Expertise

Start by assessing your knowledge of the markets, so you can ensure that you don’t get out of your depth. If you’re a total beginner, for example, then advanced options strategies might not be a great place to start.

It’s also a good idea to identify which asset classes you are most comfortable with and consider picking a handful of markets to focus on at the outset.

As you grow in confidence, you can always come back and tweak your plan.

Goals

Why are you trading? If the answer is just ‘to make money’, then you may not have thought this through enough.

Perhaps you want to get a little extra for retirement, start a new career, or free up time to spend with friends and family.  Whatever your end goal is, make sure that your plan is made with your motivation in mind.

One of the best ways to do this is to start at your end goal and work backwards. Consider where you want to be in ten years, and set ten annual milestones that will get you there.

Strengths and weaknesses

You’ll want your trading plan to play to your strengths and mitigate your weaknesses

For example, you might need to constantly watch your open positions – which can be tricky if you are holding trades overnight. You could address this weakness by sticking to day trading or using notifications and alerts to keep track of trades without always watching your monitor.

You’ll learn more about your strengths and weaknesses as you progress, so make sure to revisit and edit your plan periodically.

2. Choose your trading style

Now you have laid out your expertise, goals, strengths and weaknesses, you should be able to identify which style of trading suits you best.

If you’re targeting long-term returns and don’t want to dedicate too much time each day to opening and closing positions, for example, position or swing trading may suit you well. Or if you are planning on trading full time but want to avoid paying overnight funding, you could consider day trading.

Want to learn more about trading styles? Start the Strategies and risk course.

3. Building a strategy

Your strategy should include:

Components of a trading strategy

  • How you find opportunities
  • Your risk/reward on any trade
  • When to trade
  • Types of orders to use
  • Your exit strategy

Finding opportunities

As covered in the last two courses, most traders will find opportunities using technical or fundamental analysis – or a mixture of the two. Now you know how each option works, weigh up your preferred method for finding new positions.

Risk and reward

Determining your risk tolerance can be tricky for anyone. A solid starting point is to consider how much you can lose in total, remembering that liquidation can and does happen if you don’t maintain your full margin requirement.

Successful traders may not necessarily open more winning positions than losing ones. Instead, they manage losing trades to ensure that the winning ones keep them profitable.

Timing

Timing can be everything when trading.

As well as ensuring that your chosen markets are open when you’re planning on trading, it’s a good idea to research when they might be at their most volatile. Volatility often peaks towards the beginning or end of a session, as well as when reports or news is released.

At this point, you might also want to choose your chart timeframes. Ideally, you don’t want to switch timeframes at random. Consider picking a ‘base’ chart that you use first and foremost, with two others you can refer to when you want to confirm trends.

4. Take care of the details

The final step when creating a successful trading plan is to add as much detail as possible. Lay out precisely which markets you’re going to trade, and when. Decide how much capital to allocate to each position, as well as where to set stops and limits.

A checklist can be a useful reminder to use in practice. It helps to set your chosen path, and reinforces why you are trading. Ideally, your checklist should cover every step when finding opportunities, opening trades and managing positions.

Trading plan checklist

  1. Confirm the longer-term trend
  2. Check the calendar for major news announcements
  3. Identify a specific entry trigger
  4. Ensure the risk/reward ratio is appropriate
  5. Place trade

Finally, consider keeping a trading diary. This enables you to see precisely how your trading journey is progressing – so you can identify your strengths and weaknesses, eliminate mistakes and build on successes.

Your trading diary can be as detailed as you want. But at a minimum, it should cover your:

  1. Reasoning behind each trade
  2. Profit target and maximum loss
  3. Entry and exit levels
  4. Emotions as you entered and exited the position

A trading diary can also help you see whether you are trading consistently. If you can ensure that you are consistent with your strategy, then you can see where it is going wrong and tweak it accordingly.

Five golden rules when developing a trading plan

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Test your knowledge

Question 1 of 3
Why is it important to have a trading plan?
  • A To ensure that you trade consistently
  • B To help stay focused on your objectives
  • C To guide you when trading is stressful
  • D All of the above
Question 2 of 3
You should check your plan before you open each position. True or false? 
  • A True 
  • B False 
Question 3 of 3
What shouldn’t you note down in your trading diary?
  • A Your emotions as you trade
  • B Details of each position
  • C The weather