How to Create a Reliable Trading Plan

If you are serious about becoming a successful trader, one of the most important tools that you need is a reliable trading plan. Without one, you will essentially be setting yourself up for failure and financial loss. There are quite a few reasons why you should spend a lot of time creating a trading plan. Since trading is often a mental game, a trading plan can allow you to perform at a high level without letting your emotions take control. Trading plans also help us execute on our strategy and prevent huge losses. It will take a lot of time and effort to create a trading plan that works for you, especially since every trader is different, but in the long run, it will help you make progress towards continued success.

Keep in mind that there is no perfect trading plan, the key is to work on improving your plan as you get more experience with trading it. Most beginner traders go into their first trade without a plan at all. It doesn’t matter if they make money or lose money on their first trades, without a plan, they won’t go far. If you are having trouble creating a trading plan or you simply don’t know where to begin, this article is for you. Below, we are going to walk you through how to create a reliable trading plan and why it is essential for trading success.

1. Gain Confidence in Your Proposed Strategy

One of the first things that you need to do in order to construct a trading plan is to figure out the strategy that works for you. That means deciding what types of stocks you want to trade, what time of the day you plan to trade, how long you will keep a trade open, and what trade catalysts you are looking to identify. Finding the setups you like and practicing your strategy are key. After you have created a strategy, you must test and tweak it with paper trading to gain confidence. If you are truly confident in your proposed strategy and have mastered its mechanics, you can move on to the next step.

2. Put Yourself in Position to Succeed

A trading plan isn’t just about setups and strategy, it’s also about putting yourself in the best position to succeed. You need to focus on preparing yourself mentally so that you can execute each trade at a high level. Developing a solid trading routine should be the next part of your plan. Consider things like the time you wake up each day, how much time you spend analyzing charts before trading, and what your emotional state is prior to market open. Make sure you take care of the small details and put yourself in a position to win every day that you plan on trading.

3. Focus on Risk Management

Perhaps the most important part of a reliable trading plan is working through risk management. In trading, you should always think about the downside of each trade. Getting your position sizing wrong due to poor risk management will lead to huge mistakes. This is where you should really focus on risk-reward ratios, specific entry points, stop losses, profit targets, and your position size for a trade. Many traders commit to a certain percentage that they are willing to risk on each trade. Their maximum loss will never exceed that amount, which prevents them from suffering huge losses. For example, you might commit to a 2% max loss on each trade. That means your total loss on any trade will not exceed 2% of your total account value. One of the most important things to do when creating a trading plan is to think about how much you are willing to lose on a trade. Most beginner traders will instead think about how much they plan to gain. The downside risk is always present on every single trade, so don’t neglect to include it in your trading plan.

4. Trade Your Plan

The idea behind creating a trading plan is that when the time comes to actually execute the trade, you’ve already done all of the hard work. Your entry and exit should already be defined so that all you need to do is trade your plan. This allows you to have better control of your mental state and avoid making any emotional mistakes. Keep in mind that once your trade is live, things change a lot. The more parameters and rules you can set up for yourself to follow before the trade goes live, the quicker you will be able to react. Always trade your plan and record your progress each day so that you can continuously refine and improve your trading plan.

We hope this article has helped you gain some valuable insight into how to create a reliable trading plan. Remember that if you don’t have a trading plan you are confident in, don’t trade!