What kind of response do you think you’d receive if you were to ask ten willing traders for a copy of their trading plan? Our guess is less than 30% would reply. This highlights a clear problem and may help address why so many find it difficult to accomplish their goals in this business.
A trading plan, in our humble view, is a necessary foundation for successful trading. You will rarely see business owners without a concrete plan in place, so why should your trading business be any different? The purpose of the following segments, therefore, is to walk you through the steps required to shape a well-defined trading plan…
What is a trading plan is and why you need it
In simple terms, a trading plan is a comprehensive rule set designed to cover each and every aspect of your trading business. Just to be clear here, a few notes scribbled on the back of an envelope should in no way shape or form be considered a trading plan!
A common misunderstanding, especially among newer traders, is the difference between a trading plan and a trading method (strategy). As highlighted above, a trading plan is a set of rules that govern each aspect of your trading life. A trading method on the other hand, is the direction one follows when looking to enter and exit the markets. A trading strategy’s rules are generally included within the overall trading plan itself, which is something we’ll touch on shortly.
When live funds enter the equation, emotions typically become very commanding in one’s trading, often leading to impulsive and irrational decisions. This is primarily why we believe you need a trading plan as it can help lessen the emotional impact.
The bottom line is this: those with a trading plan, assuming it is adhered to, will remain in business far longer than those trading on a whim.
Before one can begin shaping their trading plan, however, it’s imperative to understand the reason behind why you want to become a trader/investor. Is it the financial rewards the business can offer, a possible career change, the freedom, additional retirement funds or is it simply that you have an interest in the financial markets? Whatever it is, knowing ‘why’ will help you pin down what type of trading style/plan to adopt.
For instance, if you’re looking to top up your retirement fund and are unable to be at the screen during the day, forming a trading plan that focuses on an intraday model is probably not going to be the best path to take. On the other hand, say you have a lot of free time, enjoy being involved with the markets for several hours each day and are looking to take trading up as a full-time endeavour, an intraday trading plan could be an option.
We hope you are beginning to see the importance of having a trading plan, as without it you are effectively driving blind!
In part two, we’ll dive a little deeper and look at risk and money management principles. Do yourself a huge favour – do not skip this section as it is, at least in our book, one of the most important components of any trading plan. Failure to apply these principles will almost certainly lead to financial ruin, regardless of whether you have a high-probability trading strategy or not.