When trading, I would say that planning (along with the psychology of trading) is pretty much one of the most important elements in the whole mix. You don’t just rock up and trade! Going in blind will only lead to failure and poor results. You need to build an effective trading plan that you can execute consistently.
What is a Trading Plan?
A trading plan is like setting out your own individual business plan for your trading endeavour. You can make it as complex or as simple as you want to. I always record all my trading results and put together performance statistics. That way, I am able to go back and re-analyse what worked and what didn’t. This helps me to build an effective trading plan going forward.
As a trader, I am constantly thinking of new ways to improve my results; evolving my practices and creating new strategies, all with the ultimate aim of making more money! So, your trading plan is not a static report – it is an ever changing entity and will need reviewing and updating just like your typical business plan.
What are the Key Elements of a Trading Plan?
Some of the key elements that a trading plan could include are:
- Definition of trading strategies and their application
- The times you are going to trade
- Which markets you are going to trade
- A set of objectives and targets for the portfolio
- Trade management techniques
- Risk management strategies eg. risk tolerances defined, drawdowns set
- A set of ‘don’t do’ trading rules
- Time set aside to analyse trading results
Know Your Trading Plan
The ability to consistently re-evaluate and adapt your trading plan is important if you want to become a successful trader. Many ‘wannabe’ traders go out and buy a ‘black box’ system on the promise of making a fortune. Usually, after a couple of months, the system breaks down – you’ve lost your money and have no ability to fix the black box!
In my experience, traders, trading strategies and systems all adapt and evolve with their environment. So that is why you must constantly be evaluating and developing your trading systems by knowing how they work inside out.
Probably the most important point, that I cannot stress strongly enough, is that you stick to your trading plan. There is no point doing all the planning and then getting carried away in the heat of the moment. The ability to create and follow an effective trading plan is what makes a good trader and will ensure your success in the long run.