Trading PlanWhat Is A Trading Plan?


  • There is no successful trader without an underlying well-structured trading plan. In fact, it is the foundation on which our daily activities are based. A trading plan can be compared to a corporate business plan.

    It can be built with a simple excel spreadsheet that allows the trader to log his daily and monthly operations.

    So a trading plan is especially crucial for people approaching the world of trading for the first time, as well as seasoned.

    A Typical Trading Journal 

    The following information is included in the image above:

    Signal ID, Date, Time, Time Frame, Currency Pair, Buy or Sell, Entry Signal Description (WHY?), Profit Target, Stop Loss, Risk to Reward, Direction, Price, Unit/Lot, Winning, Losing, Result in pips, Result in Dollars, Position Result in %, and Evaluation.

     

    • Pre-trade and post-trade

    A trading plan is divided into two parts: pre-trade & post-trade.

    Pre-trade is the first order of plan, which mostly provides quantitative information such as:

    -Maximum number of trades to be performed every day.
    -Maximum loss we can sustain per single strategy.
    -Daily profit target we should reach to cover the costs and make profit.
    -The strategy or strategies that we will use.
    -Which market we are going to operate on.

    Post-trade is the second order of plan which provides information of qualitative reporting, commented with a brief note showing the transactions the trader has carried out.

     

    • Why do you have to use it?

    The three fundamental reasons that should prompt a trader to use a trading plan are:

    It tests trader's discipline: Any plan is ineffective if not respected, so discipline is a crucial aspect for the trader.The trading plan allows you to verify ex post as decided ex ante, since any strategy will be useless if we do not use discipline.

    It monitors the results of strategy used: Once we can prove ourselves worthy of being disciplined traders, by being able to stick to the plans we have set for ourselves. We can analyze the results obtained by our strategy, and carry out revision where it is not profitable.

    It allows us to learn from our mistakes:  After giving a clear description to each trading operation, in the second part of our trading plan, we can understand why the trade closed at loss or whether it is our mistakes that lead to the loss. When a trader closes a losing trade it is a good opportunity to figure out what went wrong. Reasons can be different, such as failing to meet a profit target, having applied an incorrect strategy or the typical overtrading problem.

Interviews

  • the Analyst's answer

    Jean Grossett - Financial analyst

    There is nothing more dangerous in trading like being successful using a wrong approach. Most newbie traders enter a trade position based on subjectivity, or simply some gut filling. These methods of trading do not stand the test of time.

    In order to be successful, a trader must adopt a systematic approach to trading, following chart patterns, with a statistical edge. A trader can either purchase such a system from a successful mentor or embark on a research of extracting knowledge from data through machine learning algorithms. This can be achieved using data science techniques with python being my programming language of choice. Going this route can be very rigorous but profitable at the end.

  • the Manager's answer

    Robert Danvil - Investment Manager

    As soon as a strategy with high probability of success, low maximum adverse excursion and a good risk to reward ratio is found, a trader has to further step into developing a trading plan. This is necessary in order to maintain discipline during trading sessions.

    A popular saying goes like this “Insanity is doing the same thing repeatedly and expecting a different result”, and another one is “If you fail to plan, you have planned to fail”. A traders trading plan may be likened to corporate business plans of successful companies such as IBM, McDonalds, Amazon, and Wal-Mart etc. These companies keep doing the same thing over and over again, day in day out, and making huge return on investment, as well as adapting to change when it comes. Knowing what to expect from your trading strategy and plan gives no room for casino like adrenaline pumps. Following through with a strategy and trading plan can be boring but highly rewarding. If you find yourself as a trader being restless over a position, is most likely that you do not have a risk management and money management plan in place. High lot sizes from a highly leveraged accounts puts a magnifying glass on a position and makes the situation look threatening. Following a trading plan helps a trader earn the right to trade bigger lots by being diligent in little.

  • the Mentor's answer

    Nicholas Kihn - Forex coach and mentor

    I suggest a trading plan in the form of a log book or trade journal enables a trader to keep track of good trading habits and consolidate on them, as well as identify bad trading habits thereby allowing a trader to avoid such situations that leads to them.

    Prior to going live trading i.e. real money trading, it is very important to test run a trading strategy, and exercise a trading plan on a demo account or most preferably  a small cent trading account. This will give a trader the experience of following the trading strategy and trading plan under a live trading environment, where human psychology can also be put to test.

Members Comments

  1. Profile photo gravatar of Jerad Grady
    Jerad Grady (baumbach-shany)
    says:

    This is a very insightful article. Trading is like building a house. It takes diligence and good planning. Without calculating the cost of building a house one may build the foundation and run out of funds. Good planning has helped me to succesfuly maneuver the rapids and whirlpools of the Forex market.
    Every professional trader has to follow the guideline outline.

  2. Profile photo gravatar of Omer Daniel
    Omer Daniel (jfriesen)
    says:

    I believe that getting started with trading without a trading plan can be utter foolishness. However, I liked how you have explained the whole concept of making a trading plan. I look forward to more insights from you guys.

  3. Profile photo gravatar of Reina Hickle
    Reina Hickle (stella97)
    says:

    Nice article to read and absolutely right. Basically, to trade successfully you must have a trading plan. Of course it differs from person to person. But if you can stick to a plan and trade maintaining that obviously you will succeed.

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