We have worked with many successful traders over the years, some of whom are our current signal providers. They all have some sort of trading plan template.
This post will give you some tips on how to formulate your own trading plan, based on our discussions with these professional traders.
A good trading plan is dynamic enough to cater to changing markets, but simple enough for traders to apply when they are actively trading. A good trading plan is also a living document that you can adjust until you achieve your desired results.
By writing out detailed plans, you can readily evaluate market activity. Instead of hoping that the market is going to do what you want, or idly wondering if you should hold on a bit longer, you need only consult your rules to know what your next move should be.
This method changes the meaning of “mistake.” When you write out your trading plan, mistakes are no longer defined by whether you win or lose on a trade (which can lead to emotion-based decisions).
Rather, they are defined by whether you maintained your discipline and followed the rules of your plan…
Rules to Write Down
Below are some of the rules you can write down for your system to get you started. You should be as specific as possible about your plan.
For example, it’s better to say that you will enter long when the daily candle closes over the neckline on a double bottom, rather than say you will enter when you see a classical chart pattern.
- Entry rules
- Setup conditions (such as fundamentals, trends or key levels)
- Stop-loss placement
- Profit taking rules (I believe in having multiple rules here to cater for different market conditions)
- Position sizing rules (how much you will trade, and how this helps to quantify your risks)
- Market type(s) that your system works in
If your rules don’t serve as clear decision-making indicators, it’s a sign that you need to add more rules to your plan, or change them. Just be careful of making reactive changes, since we tend to overvalue recent history too much in our decision making processes.
Keep Your Plan Simple
Your rules for your trading system need to facilitate decisive action. This means that your rules for buying and selling should be clear and easy to reference.
But this does not mean your plan should lack detail and nuance. Rather, the challenge is to distill your many insights from the market into a clear plan of action.
An example of a simple plan would be to buy or sell if two moving averages cross on a daily chart with a 50 pip stop-loss and a 100 pip profit target—which is generally not going to provide you with a long-term edge.
In contrast, if you believed that the USD was going to strengthen in 2015 against the EUR due to macro-economic forces, and that the weekly market type was bear normal, then selling when the fast moving average crosses below the slow one on a daily chart could provide you with a big edge.
The actual entry rules are the same, but in the second example the entry is within the context of the bigger picture.
It is simplified, but not simple…
What to do if Your Plan is NOT Working
If you aren’t getting the results you want, it’s time to revisit your rules. The key when changing your rules is to ensure that you isolate and modify one variable (i.e. rule) at a time and watch how your trading plan performs.
Keep adjusting one rule at a time until your plan is performing the way you want it to.
For example: You place 20 trades, exactly following your rules, and then make one change (such as adding a rule that your entries must have a fundamental catalyst, or you trade in the direction of the 200 period EMA).
Next, place 20 more trades following your rules, and so on until the plan is working well for you.
Consider holding off on trading until you have written your rules down. It may be that you are already trading profitably with large amounts of capital, but in this case, written rules may help you achieve even better trading results.
Once you have written down your rules, then you can start testing at small position sizes. If you are having trouble sticking to the rules, consider having one of our signal providers do the trading for you.
It can take a lot of the pressure off and allow you to do other things that you might enjoy more.