Trading Plans

It's easy to get lost without a map, whether in life or in trading. With a map, at least you know what happened and where you were going even if you miss the mark. A trading plan is a document that details your investing rules and your trading objectives. What is the difference between a trading strategy and a plan? A strategy is part of the comprehensive set of rules of the trading plan. A plan can cover every aspect of your trading life.

Some traders call a trading plan the 'edge' that will make the trader fare better than one without a plan. Risk and money management strategies are at the core of all good trading plans.

What does a Trading Plan do?

A trading plan limits your opportunities to make bad trades. Knee jerk decision making, which is often emotional and often leads to irrational decisions, will be reduced. If you make mistakes along the way, it means that the plan is not working or you are not following the rules. Spot checking is possible because you can evaluate the results as you go.

Who Needs a Trading Plan?

All sorts of traders will benefit from a trading plan, from beginner to experienced.

Advantages

A trader with a plan has advantages over the one that does not. You can monitor your performance and evaluate daily progress against your objectives. You can trade without emotion and with minimal stress, and not rely on hunches and gut feel.

Although a plan does not guarantee success, a rigorous plan will minimise loss and enable you stay in the game longer. Plans lay down how you react to the possible outcomes. The market is beyond your control, so you control yourself by having a road map.

Template

Trading plans should be customised to suit trader resources and personality. Write down the answers to the following questions to help formulate your trading plan.

• Why do you want to be a trader? Set SMART (specific, measurable, attainable, relevant and time-bound) objectives.
• What kind of trader are you? List your strengths and weaknesses.
• What are our income targets and your (annual, monthly, weekly and daily) trading goals? What you are trying to achieve?
• Which market do you want to trade and how many? What instruments will you trade?
• Which timeframes will you trade? Beginners can stick to using one trading timeframe then diversify as you go. Experienced day traders sometimes use a 1-minute timeframe to enter, 5-minute to exit and 15-minute for monitoring.
• What tools are you going to use? Learn about the pros and cons of every tool you select.
• Which broker would you employ? Make sure to compare broker spreads/commissions.

For more information on trading plans and templates, here's a great reference.