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Six Steps to Writing A Battle Tested Trading Plan

By Robert Colville on January 7, 2014

5 (100%) 2 vote[s]

Ever head the cliché: If you fail to plan you plan to fail? Trading financial markets are no different from this. Ask any rookie what their trading plan is and it’s likely they will be lost for words. Ask and seasoned professional and they will tell you that you are faced with two choices: “plan and follow the plan or fail”. It’s no coincidence that the majority of rookies do just that. But you don’t have to.

In this article, I will show you how you can create your own trading plan to suit you and it need only take minutes.

Don’t be fooled. Devising a trading plan is not something that newcomers to the market do as part of their learning. Professional traders, investors and wealth managers from all backgrounds and styles have one thing in common – they have a trading plan.

How to write your trading plan

Chose a Timeframe That Fits into Your Lifestyle

trading from the beachThe great advantage forex has over and above any other asset class in that currency markets are open 24 hours a day, five days a week, meaning that you can easily adopt a style that neatly ties in with your availability to trade.

So here’s the question: who are you? You may be someone who relishes the prospect of higher timeframe trading, where you can simply set your orders up and walk away. This is what we Lazy Traders do. If this is the case, then trading the daily, weekly or even monthly charts will be the ace up your sleeve…

…Or you may be the type of person who would rather intra-day trade by going in and out of the market as and when there are opportunities on the smaller timeframes, such as the hourly or fifteen minute chart.

What style you choose is entirely up to you – but it largely depends on how much time you available and are prepared to commit to chart gazing. Remember, the higher the timeframe you trade, the less time will be required to analyse, spot and maintain your trades. If you have a day job then higher timeframe trading will be your best option.

Only choose to trade intra-day if you know you are free to trade for several hours a day (for example 7am – 10am London time to trade the European session, Monday-Friday). The smaller timeframes are often viewed as the exciting timeframes to trade for the many market newcomers, but realistically, they you will need a large trading account, consistency in your trading strategy, and the absence of a day job to make it work.

Only choose end of day trading if you are able to look through the charts at least once a day to see if you have a set up on the daily timeframe. If you choose to trade the weekly timeframe you may have a lot of free time on your hands but remember you will need to analyse the charts and potentially trade once a week (at the week end or beginning).

This is called being in “the opportunity flow”. Remember, markets are random and wins and losses can happen at any time. By choosing a timeframe that fits into your lifestyle alongside a profitable strategy, you will be able to continuously be in the flow of wins and losses will gain you over time. Those who fail to be consistent in their approach typically miss out on the flow of winning trades.

What’s Your Risk Appetite?

DiceHow much of your trading account are you prepared to lose if the trade goes “the other way”? Remember, no one likes to lose money but as a professional trader, you should accept that losing is part parcel of trading. But you can keep losses to a minimum thanks to using effective risk management.

Keep the risk low – no matter how good the technical set-up looks. Remember, anything can happen at any time and sometimes even the best looking set-ups don’t pull through. As a rule of thumb, never risk more than 1% of your account’s value. Only until you are consistently profitable then risking 2-3% makes sense.

Choose a Strategy That Resonates with You

There are literally thousands of strategies out there. Some of them work some of the time, some of them work most of the time. But no trading strategy works the whole time!

Firstly, choose a strategy which you can trade on your chosen timeframe. After all, it makes no sense to trade a system that you are not available to trade.

Secondly, make sure you understand the logic behind it. There is absolutely no point in trading something you don’t understand! Professional traders take their trades, based on their strategy, with absolute conviction and without hesitation.

Next step is to paper trade it. You can do this with a demo account with pretend Preponderancemoney. While there is no substitute to mastering the markets on a live, funded account, it’s essential that you have faith in your chosen strategy before migrating over to a live account. A good yardstick will be to demo trade it over a three month period and if your strategy has proven itself as a success, then trade it with real money.

Hope for the Best But Plan for the Worst

Far too much emphasis is always placed on looking for trade-setups over and above how to manage them while the trade is in progress. You may have a valid trade set-up, but how do you intend to manage the darn thing when you’re in it?

You should have a firm set of rules dictating how you plan to respond to any eventuality once the trade is in motion. To follow these rules to the letter is essential. Not only will it take the emotion out of trading, it will contribute towards a set of trading results which are scientific rather than skewed.

Ask yourself, how frequently and to what extent do you intend to trail your stoploss to bank profit? Will there be a point at where the set-up invalidates itself and you exit early to avoid a full loss? Do you have a target price? These are all questions that need answers before heading into the trade.

Target High Reward

end of day tradingHow much reward do you want for every trade you take?  As much as possible, you are probably thinking! Well, the good news is that you can be selective, deciding only taking trade set-ups which have a far greater reward potential than you are risking in pursuit of it. However, take heed of the two words: “reward potential”.

When selecting trades where you could stand to profit more if you win than you stand to lose if the market goes the other way, it’s essential to be realistic! Always assess the probability of the trade set-up hitting your target by keeping it within the realms of possibility rather than what you want to happen. Unfortunately the market doesn’t care about what you and I want to happen – it will do it’s thing regardless.

Keep Records

Successful traders keep meticulous records. To many amateurs traders, the very idea of keeping a trade journal will be little more than a bore. However, you should treat it as an effective way to keep accountable with the trades you take and disciplined by taking only the trades which fulfil your rules for entry.

Keep a running record in an Excel spreadsheet of the date you took the trade, the instrument, entry, stop-loss, target and result.

From doing this, not only will you have a running profit and loss statement, you will have a useful record so that you can retrospectively compare your winning set-ups versus your losses.  This will be very useful, allowing you to assess what you can do to eliminate future losses and whether your strategy needs tweaking. This is the accounting part of your trading business and should not be overlooked.

The Last Word

You owe it to yourself to write yourself a trading plan. A trading plan will put you head and shoulders above many have-a-go players in the market. Not only will it be essential in cementing your strategy, how to execute it and when, it will help to keep you accountable to yourself as well as disciplined in the business where you are CEO.

While having a trading plan won’t guarantee you money in trading, it’s well and truly is a jump in the right direction. You will have empowered yourself by giving yourself the best chances of success for long-term survival.

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Robert Colville

The Lazy Trader is a fund level Forex Trader who trades for no more than ten minutes a day. If you want to learn to trade successfully in his set-and-forget style, have a look at his online trading course

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Robert Colville

The Lazy Trader is a fund level Forex Trader who trades for no more than ten minutes a day. If you want to learn to trade successfully in his set-and-forget style, have a look at his online trading course

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