Futures, FX, Risk Management, Trading Education

How to Build a Winning Trading Plan?

Risk managment

It’s quite straight forward, methodically follow a written plan or fail. Creating a plan that works in financial markets undoubtedly takes time, effort and research, and even then there is no guarantee of success. A trading plan should be written and then set in stone, but is subject to adjustments as the market conditions evolve. 

A solid trading plan considers both the trader’ personal style and goals. This article will delve into the importance of a trading plan and strategy, knowing when to enter and exit a trading position as well as stop-loss prices and profit targets. 

How to Build the Perfect plan?

A plan should be written with clear signals that are not subject to change while you are trading, but subject to revaluation as the markets evolve. You want to be able to generalize well because markets are not stationary, markets change and regimes happen. The plan can and should change with market conditions. Each trader should write their own plan, taking into account personal trading styles and goals. Building the perfect master plan is subjective, as no two traders are exactly alike. Each approach will reflect important factors like trading style as well as risk tolerance. 

What are the Essential Components of a Solid Trading Plan? 

The first step in creating a trading plan is giving yourself a skill assessment and asking yourself if you’re ready to trade. Make sure you have tested your plan by paper trading it, have confidence that it will work in a live trading environment and that you are able to track your signals without hesitation. 

Next make sure you are mentally prepared. If you are not emotionally and psychologically ready to battle the market then sit back down and try again tomorrow. Additionally, your trading area should be free of distractions because distractions can be costly. Furthermore, many traders have a routine to get them ready for their trading day. If you don’t have one consider making one to put you in the trading zone for the day. 

What separates excellent and experienced traders from beginners is their ability to maintain excellent records. If they win a trade, they want to know exactly why and how, and more importantly they want to know the same when they lose, so they don’t repeat unnecessary mistakes. Write down as many details as you can such as targets, the entry and exit of each trade, the time, support and resistance levels, daily opening range, market open and close for the day, and record comments about why you made the trade as well as the lessons you learned. Keep track of your profit loss, commission, daily winners and losers, weekly profits, and individual trade setups.

This will help you spot trends in your trading and fine-tune even further. You should also save your trading records so that you can go back and analyze the profit or loss for a particular system, the amounts lost per trade using a trading system, average time per trade necessary to calculate trade efficiency, and other important factors. 

How to Actually Develop a Trading Strategy?

You might be wondering what the difference between a trading plan and a trading strategy is in the first place. Well, your trading plan is your business plan that can be broken up into two sections, and your trading strategy is a piece of your trading plan. 

The first section of a trading plan is market ideology. Included in this plan should be your specific goals, your inspiration, and your ideology towards the markets. This section of your plan is important because it gives you direction and guidance, which is especially helpful through the inevitably hard times.

The second section is your trading strategy which should be incredibly detailed. Every possible outcome must be thought out and outlined in order to succeed. It is highly recommended to focus on and perfect one strategy before moving on to another. Once you have your first strategy and can enter your trades without hesitation you are ready to build additional strategies.

Before you start trading however, establish your risk level. How much of your portfolio are you willing to risk on one trade? Your risk level is dependent on your trading style as well as your risk tolerance. Once you define your risk tolerance, set realistic profit targets and sharpe ratios. Ask yourself, what is the minimum risk to reward ratio you are willing to accept? 

Next prepare for trading by labeling both major and minor support and resistance levels on the charts. This is applicable no matter what trading system and program you’re using. Be sure that all signals can be easily seen or detected with a clear visual or auditory signal.

Most traders make the mistake of concentrating most of their efforts on looking for buy signals, and pay very little attention to when and where to exit. Many traders don’t sell if they are down because they don’t want to take a loss. The harsh reality is that if you don’t learn to accept these losses you will never make it as a trader. 

That being said, it’s important that before you enter any trade, you know your exits. There are at least two possible exits for every trade. First, is your stop loss if the trade goes against you, and second is the profit target for the trade. Both need to be written down, a mental note does not count. 

Setting entry rules comes next. Your system should be sophisticated to be effective, but simple enough to facilitate snap decisions. If you have 20 conditions that must be met and many of them are subjective, you will find it difficult if not impossible to actually make trades. Ensuring a certain degree of freedom in your strategy is a positive characteristic. 

In this light, computers often make better traders than people, because they don’t have to think or feel good to make a trade. If conditions are met, they enter. When the trade goes the wrong way or hits a profit target, they exit. They don’t let emotions get the best of them, but rather let each decision be motivated by probabilities.

Lastly, specifying the markets and time of the day you will trade is also helpful. While there is always a market open somewhere, the best traders focus on a select few and specific times to trade. There are other vehicles out there besides the common Stocks, Options, Futures, and Forex. What works for one trader may not work for another and vice versa. Whichever market you choose, once you’ve placed some trades with your strategy you can begin to analyze the data. A paper trade account is a great way to tweak and fine-tune. 

Conclusion

A plan should be written with clear signals that are not subject to change while you are trading, but subject to revaluation as the markets evolve. To begin, give yourself a skill and emotional assessment. Next make sure you have a notebook handy to journal your trades and relevant information. Defining your entry, stop, and target before you place the trade will keep you objective and thinking clearly as the trade starts to unfold is arguably the most important part of a strategy. 

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