A trading plan is a complete set of rules that covers every aspect of your trading life. Many experts refer to the need to have an ‘edge’ which will tip the balance of probabilities of success in your favour. In itself, a plan is not an edge but, over time, the trader with a plan will fair a lot better than the trader without one. Many amateur traders do not have any sort of plan to trade by, and enter the markets with scant regard to their risk and profit objectives. Suffice to say, comprehensive risk and money management strategies lie at the heart of all good trading plans.
Your trading plan needs to address the fundamental questions regarding trading, starting with a simple definition of what trading is for you.
Your plan then needs to move into why you need a plan at all and once you have created one, what it will do for you. If you already have the basics of a trading plan excellent, you have already determined the merits of planning your trades and your financial future.
Trading with a plan gives you the ability to monitor your performance. You can evaluate your progress continually, day-by-day, in a way that is objective and comprehensive. This enables you to trade without emotion and with minimal stress. The trader without a plan is not able to do this and their trading tends to rely upon gut feeling, hunches and tips. Trading this way is a nail biting, emotional roller coaster ride of stress that, inevitably, results in financial loss.
Obviously, a plan does not guarantee success; that would be too simple. However, a good plan that is adhered to strictly will help you to minimise losses and enable you to stay in the game a lot longer. While a plan cannot predict the future, it can lay down how you react to the possible scenarios that will arise in your trading career. This is why a plan is essential. It is a list of systematic responses to events beyond your control. The only thing you can control is way you react.
Who Needs a Trading Plan?
Who needs a trading plan? Well, unless you have been a consistently profitable trader over a sufficient length of time to encompass a number of different market conditions, then YOU need a trading plan! If you have achieved this, then this document may not tell you anything you do not already know. However it may still prove useful as a “refresher” course or indeed open your eyes to new aspects of trading that can improve your profitability.
What Will a Trading Plan Do?
A trading plan will make the act of trading simpler than it would be if you traded without one. It will limit your opportunity to make bad trades and it will prevent many psychological issues from taking root. It will help you to achieve these things because wherever you are on your stock trading journey, it will not only act as a roadmap, but also locate your position as well.
More importantly, if your trading is going badly, you will know it is down to one of only two possibilities: either something in the plan is not working or you are not adhering to the plan. If the plan is a good one and it is back tested and paper traded, (or forward tested with a very small amount of money) then the fault is likely to be found in the latter of the two options.
But, what if you are losing money whilst trading without a plan? It is virtually impossible to distinguish what you are doing right from what you are doing wrong. You have no way to evaluate your results, therefore the likelihood of being able to diagnose the fault and correct it is small and could take forever. A trading plan is your personal GPS device to locate your position and, if you have made a wrong turn, it provides the means to identify where you went wrong and how to get back on track. You are able to evaluate continually your results and, more importantly - your discipline - in a manner that is objective and comprehensive. This is extremely difficult to do if you do not have a plan.
A trading plan should take away much of the decision making in the heat of the moment. Emotional issues become very powerful when real money is on the line and, may force you into making irrational decisions.
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