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The importance of a trading plan cannot be overstated, but the number of traders without a trading plan far exceeds the number of traders with a trading plan.
Without a comprehensive attack plan, it is easy to get off track. Your plan does not need to be overly detailed, a few pages or so should suffice. But the more detailed the better. The idea here is to systematize your process as much as possible – make it repeatable.
Some key components should be included, but keep in mind that there is a lot of flexibility to customize it to your specific needs. When you’re done and have a plan, remember this acronym – K.I.S.S. (just keep it silly).
MUST HAVE A TRADING PLAN
Whatever we plan to do, if we want any chance of success, don’t we plan ahead? some kind of plan? Trading is no exception. The market is too active and filled with too much uncertainty to navigate without a solid framework. Planning is essential if you want consistent trading results. They’re also great at helping you identify your strengths and weaknesses so you can do more of what works and stay away from what doesn’t.
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RISK MANAGEMENT
As I have emphasized in all of my webinars, proper risk management is one, if not the most critical, aspect of successful trading. The trading psychology of discretionary traders is closely related to risk management. Without good risk management, the rest of the trading plan is irrelevant, no matter how good it is. This is the first thing you need to be clear in your plan.
You need to know your risk tolerance and adopt a risk management strategy that works for you. Know the risk you take on each trade and the total risk across multiple positions. How many positions can you hold at one time? (Less are easier to manage.)
Use the maximum drawdown as a “kill switch” when things don’t go your way. For example, if you encounter a 10% retracement, you will pause or at least reduce your trade size. Remember, the trader’s first priority is to preserve capital. (See this risk management session for more details.)
ANALYTICAL APPROACH
It’s easy – what are you using to identify the settings? It doesn’t matter what you use, what matters is that it makes sense and is used consistently. It could be a combination of price support and resistance, trend line/slope analysis, chart patterns, Fibonacci levels, moving averages, Elliott Wave Principle (EWP), sentiment analysis, fundamentals, and more. Maybe all the stuff together. There’s a process in place, that’s the point. It’s hard to outline this at first, but over time things will fall into place. Even if you’ve been doing this for a while, a year or two, as you mature as a trader, your plans may continue to change, perhaps even dramatically.
WHAT MARKETS WILL YOU FOCUS ON?
Not every market works the same way. It’s a good idea to keep your universe relatively small, as this not only helps keep things simple, but also gives you an idea of the personality of your key market. You can go a step further and focus on a specific time frame for each market type. For example, you can trade stock indices on very short time frames (days or less), but choose to trade Forex from a swing trader’s perspective (days to weeks). You can also dynamically touch one market but not the other, ie. H. – 75% FX, 25% Indices/Commodities.
TIME-FRAME, HOLD TIME
On average, what is the expected hold time for your trades? Are you a swing trader holding weekly/daily/4 hour charts for days to weeks, or are you focused on day trades that are held for hours or less, thus reducing your usage to 1 per day? – Minute chart? It could be a mix of the two.
For beginners interested in day trading, it is best to slow down and slow down before moving to the fast pace of day trading. It is a good idea to focus on a few time frames at most, as trying to manage trading on multiple time frames can be a daunting task, even for seasoned traders.
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FAVORITE TRADE SET-UPS
Which settings work best for you and which ones appeal to you the most? It probably goes without saying, but these should be the focus of your trade. Set up an alignment (convergence) based on any number of factors that create high confidence trading opportunities. If you are new to trading, you will need some time to figure this out. So, be patient to see what works best for you.
Setting it up is one thing, but how you run it is another. There are facilities, and then the way you use the facilities. For example, a group of 10 traders might sit at a computer and use the same tools, but the way they analyze and execute the market will vary from person to person. For example, a market may be in a range and one trader will buy immediately when the market breaks out of that range, while another trader who has identified a breakout of the same range may wait until the first pullback to trade.
HANDLING ADVERSITY (AND SUCCESS)
When you encounter an inevitable retracement, what do you do to make sure it doesn’t become harmful? You should reduce your trade size or stop trading altogether for a short period of time so you can reduce stress and identify the problem. It is very important to have a plan before it happens.
It’s also important to have a plan when things are going well. If not managed properly, overconfidence can be a killer and lead to losses. While it is good to be more aggressive when market conditions are favorable and you are doing well, you must do so responsibly. A 50% increase in your risk isn’t out of control, but suddenly quadrupling your risk can leave you facing frustrating and potentially damaging outcomes.
HAVE A ROUTINE FOR STAYING ON TRACK
You should take time to reflect on the events of the week and how you acted. It’s a good idea to review your trading plan regularly and make adjustments as needed. Regularly reviewing your history and keeping a trading journal is an excellent way to ensure you are following the process outlined in your plan and to identify your trading patterns that may lead to further adjustments to your plan. Save a trade setup chart so you can regularly remind yourself of good and bad trades.
Watch the video above for the full conversation…
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